Limit

• For people younger than 50, the maximum traditional IRA contribution for 2010 is $5,000 per year. Those 50 and older can contribute up to $6,000 contribution per year without penalty, according to the IRS. However, you cannot contribute more than your taxable compensation each year. If you earn $4,500 in 2010, for example, you can contribute only $4,500 the same year, not $5,000.
  
  

Solution

• Excess contributions sometimes happen by accident. If this happens, simply withdraw the money or apply the excess to the next year, the IRS recommends. However, make sure your next year’s contributions take the excess of the previous year into consideration.
  
  The sum of the excess and the following year’s contributions cannot equal more than $5,000 for those younger than 50, and $6,000 for those who are older.
  
  

Timing

• Sometimes one spouse makes a contribution the other knows nothing about, or someone performed an improper rollover from a different retirement plan, resulting in excess contributions. In these cases, the owner of the IRA has until the due date for the tax return that year to correct the problem penalty-free.
  
  

Penalty

• Account holders who don't correct excess contributions before the tax return due date must pay an excess tax. In 2010, the excess tax was 6 percent of the excess contributions. Each year that the excess contributions stay in the account means an additional 6 percent tax, states the IRS.
  
  

Warning

• In 2009 and earlier, people previously employed by bankrupt employers could contribute catch-up IRA contributions without penalty. In addition to the $5,000 or $6,000 limits, they could also contribute an additional $3,000 per year. But starting in 2010, the IRS doesn’t allow these catch-up contributions without penalty.