With tax time here, it is a perfect time to check your IRA accounts for any errors that may have occurred throughout the year. Some common mistakes that are made with IRAs are contributions are too much, making prohibited investments, engaging in prohibited transactions, making a restricted rollover, withdrawing prematurely, and missing a required minimum distribution (RMD). Some of these errors can be remedied before it is too late, and you spend too much money.
If your contributions to your IRA in 2012 were too much, you have until April 15th, including extensions to remove the excess contributions without paying a penalty. You will not have to pay tax on the excess contribution, but you will have to pay tax on the earnings that the contribution made while in the IRA. Failure to remove these excess contributions is subject to a 6 percent penalty for each year that the mistake is not corrected.
Prohibited IRA transactions would include such things as investing in collectibles. If an IRA owner makes a prohibited transaction within their IRA, the amount invested will be considered withdrawn in the year that the investment was made. The amount is subject to income tax, and if you are under 59 ½, the withdraw is subject to the 10 percent penalty for early withdraws.
If you have engaged in a prohibited transaction such as borrowing money from the IRA, selling property to it, receiving unreasonable compensation for managing it, or using it as collateral for a loan can subject the account to taxation.
If an IRA owner constructively receives a distribution from an IRA, and intends to roll the amount received over, they have 60 days from the time of the receipt of the money to put it into another qualified plan. Failure to do so is called a restricted rollover and the amount that was withdrawn will be subject to income tax.
Withdrawing money prematurely from an IRA could cause you to pay penalties. If you are under 59 ½, and you make a withdrawal from an IRA, your withdrawal is subject to income tax in addition to a 10 percent penalty. Be careful when deciding to make these types of withdrawals.
If you are 70 ½ you are required to take a required minimum distribution (RMD) from your IRA each year. The amount that you must withdrawal is based on a formula calculated by an actuary. If you fail to make this RMD you will be subject to a 50 percent excise tax in addition to income tax on the RMD that you never took.
When dealing with IRAs you have to be careful to follow certain rules. Don’t get caught making a mistake, as the penalties for doing so are harsh.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses, The Ultimate Real Estate Investor Tax Guide, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax, The Complete Guide to the Affordable Care Act’s Tax Provisions, The Complete Guide to Retirement Plans for Small Businesses, The Complete Guide to Estate, Gift and Trust Taxation, The Complete Guide to Hiring an Accountant, The Complete Guide to Subchapter S-Corporations,, and Free Money. All available exclusively on Kindle