There is a buzz going around that the IRS will start paying more attention to individual retirement accounts as a way to collect more tax revenue. Last week, The Wall Street Journal released an article indicating the IRS could become more aggressive when it comes to tracking IRA accounts and accessing tax penalties when IRA rules are not followed by the account holder.
IRA Rules Get Trickier
The Wall Street Journal
June 22, 2012
The article states that U.S. citizens have $4.9 trillion in IRA assets, and the IRS is currently letting hundreds of millions in potential tax penalties slide. “The government lets millions of dollars in tax penalties on IRAs go uncollected each year—$286 million in 2006 and 2007 alone for missed withdrawals and contributions that break the rules.”
The penalties associated with IRA mistakes are costly. The highest penalty IRA holders face is for not taking RMDs. “People who fail to take a ‘required minimum distribution,’ usually starting at age 70½, can be hit with a penalty of 50% of the amount they should have withdrawn. The same levy applies to required withdrawals from an inherited IRA, including inherited Roth accounts. (Contributions to Roth IRAs aren’t deductible, but withdrawals are tax-free after holding requirements are met.)”
Help ensure your clients IRAs are in good order to ensure they won’t find themselves facing steep tax penalties for simple mistakes. The Wall Street Journal article is a good starting resource, and make sure to inform yourself of all the IRA rules by reading the IRS publication 590.
Here are a few of the potential IRA mistakes that could end up costing your clients tax penalties:
- Watch for any clients claiming deductible IRA contributions that might be over the modified AGI limits set by the IRS.
- Make sure clients are not contributing more than the maximum amount.
- 2012 IRA and Roth IRA Contribution limits – Clients under 50: $5,000
- 2012 IRA and Roth IRA Contribution limits – Clients 50 and up: $6,000
- Remember clients cannot contribution more than what is considered by the IRS as earned income, which includes wages, commissions, and alimony.
- Keep a look out for clients over age 70.5 to ensure they are taking RMDs and that the RMDs are calculated correctly.
- When a client is transferring an IRA, make sure the transfer is completely rolled over into a new IRA within 60 days, to prevent this from being considered a distribution or withdrawal from the IRA.
- Pay special attention to clients with inherited IRAs and inherited Roth IRAs, as special distribution rules apply. BOTH inherited IRAs and inherited Roth IRAS are subject to RMD rules.
- Remember, workers that are still participating in a company sponsored retirement plan, like a 401(k), can avoid taking RMDs if they are over 70.5, but that rule DOES NOT apply to IRAs.