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5 Potential IRA Mistakes

Look out IRA investors because the IRS looks like it will be turning its attention to taxpayers who make mistakes with their IRA accounts. (source: www.wsj.com)    This includes matching distributions to your tax returns, stepped up audits, and tighter reporting overall when it comes to scrutinizing IRA accounts.    As I have shared for the last couple of years on Your Smart Money Moves, the Government is in dire need to increase revenue to balance the budget and pay off our voluminous debt.    One way to do this is to crack down on the mistakes that we make as taxpayers.   Nobody likes coming home and getting a letter in the mail from the IRS.  So here are five mistakes you might be making for the IRS to take a closer look at your tax return.

  • Contributions To Roth IRA Accounts –   While some of you did Roth IRA conversions back in 2010 (and some are still converting), a Roth ‘conversion’ and a Roth ‘contribution’ are two different animals.   First off, you have to produce earned income to be able to contribute to a Roth IRA.   Thus, if you didn’t have earned income (happens a lot with people who work overseas) and contributed $5,000 to your Roth IRA, you may have an excess contribution problem which could lead to penalties down the road.   More importantly, contributory Roth IRA’s have phase outs based upon your family modified adjusted gross income.  In 2012, the phase-out where you cannot make a Roth IRA contribution is $183,000 for a married couple and $125,000 for a single person. (source: www.irs.gov).
  • Not Making Required Minimum Distribution– Taxpayers need to begin taking a yearly Required Minimum Distribution after the age of 70 ½.    Failure to take at least the minimum correct amount can result in a 50% penalty.  Yes, a 50% penalty.   Many people in retirement forget that the RMD calculation is an aggregate of all of their qualified plans and not just one or two IRA accounts.  Consequently, when they have five or six IRA’s at different institutions, they can sometimes underestimate the real amount they should have distributed based upon all December 31st aggregate balances. 

     

  • Failure To Rollover IRA Or 401(k) In 60 Days – Some people have moved their IRA from one institution to another by taking a check in their name.   Or perhaps you need to take a short term loan from an IRA and you actually did put the cash back in the IRA account.   Remember, that once a check gets made out to you that you have 60 days to get it back into that IRA/Qualified Account or it will be treated as a distribution.   Some taxpayers fail to report this distribution because they think the rules are 90 days, 180 days, or even a year.   This can cost you dearly in more federal taxes and unnecessary early distribution penalties.
  • Taking An IRA Deduction– Many individuals are under the impression that they can deduct a Traditional IRA or Spousal IRA contribution no matter what level of income that they make.     One question you need to ask yourself first is were you eligible to put money into a qualified plan offered at the workplace.   If you had no qualified plan (or your spouse), then you will have the ability to deduct the IRA no matter how much money you make.  If you or your spouse contribute (or are eligible to contribute) to a 401(k), 403(b), etc. at work, the IRS has phase-out rules as to whether you can still deduct the IRA contribution.    You can always contribute to a traditional IRA account, but the big question is whether the contribution is deductible. 

     

  • SEP’s and SIMPLE’s – If you are a small business owner, it’s likely you have a SEP retirement plan or a SIMPLE retirement plan if you didn’t set up a 401(k) for your company.     The IRS will be looking at whether you accurately separated employee and employer contributions, and whether you actually followed the letter of the law on rules you set up within the plan.   Many times these plans are set up by investment managers or mutual fund salespeople without much conversation between the client, the broker, and the CPA.   If you have made excess contributions or incorrect contributions this could cost you with additional penalties and interest that are unwanted.

 

Who know how quickly this SWAT team from the IRS will begin tackling the mistakes taxpayers make in the IRA’s. 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 reasons range from bureaucratic hurdles to tax forms that don’t provide enough information, according to a report by the Treasury Inspector General for Tax Administration, the federal tax watchdog. (source: www.wsj.com)    If you consider the fiscal deficit we are in the IRS will have to crack down to get this uncollected money so we can begin to balance budget.    Check your IRA account and make sure you haven’t made one of these five mistakes.

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services

Visit to www.oxygenfinancial.net to request a free consultation with the leading financial experts for people in their 20’s, 30’s, and 40’s in the country.

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About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

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