The Individual Retirement Account allows you to save for retirement on a tax-deferred basis. The IRS imposes penalties if you take money out of an IRA before a reasonable retirement age in order to encourage you to grow your savings over the long term. Ultimately, however, the IRS requires you to stop contributing to your IRA and actually start withdrawing your savings.
Contribution Age Limit
You cannot contribute to an IRA once you reach age 70 1/2. The specific IRS rule is that you cannot make a contribution for the year in which you turn 70 1/2, nor for any subsequent year. For example, if you turn 70 years of age on June 30, you cannot make an IRA contribution at all for that entire year, as you will turn 70 1/2 on December 30.
Penalties for Continuing Contributions
If you make a contribution during or after the year in which you turn 70 1/2, the IRS classifies your contribution as an excess contribution. You have until the day that your tax return is due, including extensions, to remove the excess contribution from your account to avoid penalties. If you leave your excess contribution in the account, you must pay 6 percent of the amount of the excess contribution for each year that it remains in the account.
Required Minimum Distributions
In addition to the restriction on contributions after age 70 1/2, the IRS also imposes a minimum distribution rule. You must take out a certain percentage of your IRA every year after you turn 70 1/2. The amount varies annually and is based on a combination of your account value and your age, from which the IRS derives your life expectancy. The penalty for neglecting to take your distribution is 50 percent.
Roth IRAs
The Roth IRA is an exception to many of the rules that apply to other types of IRAs. You can continue making contributions to a Roth IRA indefinitely, regardless of your age. Additionally, you never have to take money out of your Roth IRA. Part of the reason for this difference is that you fund a Roth IRA with after-tax dollars, so your distributions are tax-free. If the IRS required distributions from a Roth IRA, it would not generate any additional taxable income as with distributions from other IRAs.