{"id":1986,"date":"2012-07-30T16:02:13","date_gmt":"2012-07-30T20:02:13","guid":{"rendered":"https:\/\/blog.bradpine.com\/?p=1986"},"modified":"2014-02-11T17:47:13","modified_gmt":"2014-02-11T22:47:13","slug":"put-your-ira-in-good-order-to-avoid-the-crackdown-on-penalties","status":"publish","type":"post","link":"https:\/\/blog.bradpine.com\/2012\/07\/30\/put-your-ira-in-good-order-to-avoid-the-crackdown-on-penalties\/","title":{"rendered":"Put Your IRA in Good Order to Avoid the crackdown on Penalties!"},"content":{"rendered":"

\"\"<\/a>Is your Traditional IRA or Roth IRA following all the rules? You may assume the answer is yes, but IRA mistakes are far more common than you may realize, and the IRS is gearing up to investigate and penalize them accordingly. \u00a0The Wall Street Journal reports that in 2006 and 2007 the IRS let about $286 million in penalties go uncollected, and by October 15 it will present a report to the Treasury Department on how it plans to crack down on future mistakes. This means that the time to get your IRA in order is now!<\/p>\n

The most common IRA mistakes come from three areas: contributions, distributions, and inherited IRAs.\u00a0 Keep reading to learn about some of the ways people trip up in these areas and how to avoid them!<\/p>\n

Contribution Limits
\n<\/em><\/strong><\/span><\/h2>\n

The contribution limit for 2012 for both Traditional and Roth IRAs is $5,000 per person, or $6,000 if you are age 50 or older. If you have more than one IRA, the contribution limit applies to all of your accounts taken together. Remember that there are income limitations on contributing to a Roth IRA, so you may not qualify to contribute the full amount.<\/p>\n

An \u201cexcess contribution\u201d is made when you contribute to a Roth IRA despite having too high an income or when you contribute more than the annual limit to either a Roth or Traditional IRA. The penalty on excess contributions is 6 percent of the extra amount deposited; this may not seem like much, but if the account has several years of excess contributions the penalties can add up very quickly! An excess contribution can also be triggered when transfers or rollovers are not done correctly, meaning that the entire balance transferred could be hit with a 6 percent penalty.<\/p>\n

So remember to roll over your IRA directly between institutions, or, if you decide do it manually, keep in mind that you have only 60 days to do so or you will pay regular income tax and, if you\u2019re under 59.5, a 10 percent penalty. Excess contributions are a surprisingly big source of potential revenue for the IRS: It\u2019s estimated that in 2006 and 2007, excess contributions to IRAs amounted to about $1.6 billion!<\/p>\n

Required Minimum Distributions<\/strong><\/span><\/h2>\n

Mistakes in distributions also often come from mismanagement of Required Minimum Distributions (RMDs), which are the mandatory drawdowns from your Traditional IRA that start when you reach 70.5 years of age. Your minimum distribution is your account balance as of December 31 in the year before you reach 70.5 divided by your life expectancy (provided by the IRS in Publication 590<\/a>), which can be taken from one or several of your IRA accounts. The penalty on any portion of an RMD not taken is a whopping 50 percent, so it is critical that you take your distribution each year and keep tabs on the amount that you need to draw from your accounts.<\/p>\n

Inherited IRAs
\n<\/em><\/strong><\/span><\/h2>\n

Keep in mind that there is no required mandatory distribution (RMD) on Roth IRAs unless you inherit one, in which case you\u2019ll need to start taking distributions the year after inheritance (if the assets have been in the account for\u00a0 more than five years, RMDs will be tax-free). This brings us to another one of the major sources of confusion and potential penalties: Inherited IRA accounts.<\/p>\n

If you inherit a Traditional IRA from your spouse, things are relatively simple. You can roll the account over into your own Traditional IRA, which allows you to treat the assets as your own and delay RMDs until you reach 70.5. Alternatively, you can move the assets into an inherited Traditional IRA account. In this case, if your spouse was over 70.5 at the time of death, your RMDs would start the year after his or her death, and if your spouse was under 70.5 the RMDs would be delayed until he or she would have reached that age. There are two situations where this strategy is advantageous. First, if you are older than your deceased spouse and your spouse was younger than 70.5, you can delay RMDs until he or she would have been 70.5 years old. Second, if you are younger than 59.5 and need the assets, you can begin taking RMDs the year after your spouse\u2019s death without incurring a 10 percent early withdrawal penalty.<\/p>\n

For Roth IRA accounts inherited from a spouse, you can also either transfer the assets into your own Roth IRA or move them into an Inherited Roth IRA. Keep in mind that withdrawals of income earned are tax-free only if the assets have been in the account for five or more years (contributions can be withdrawn tax-free anytime). The clock on the five years does not reset at the time of inheritance; in other words, you get credit for the years that your spouse held the account.<\/p>\n

For any other beneficiary, you must<\/span> begin making withdrawals from an inherited IRA the year after the person\u2019s death, regardless of whether it is a Traditional or Roth IRA. The procedure is the same as it is for a regular RMD: You take the account balance at the end of the previous year and divide it by your own life expectancy. It does not matter how old you are when you inherit the account, the distributions must begin the year after you inherit it. Distributions from inherited Roth IRAs are not taxable, while those from inherited Traditional IRAs are taxable at your income tax rate. Keep in mind that the penalty for not making a mandatory distribution is 50 percent of the undistributed amount. It\u2019s generally recommended that multiple beneficiaries split the account into individually titled inherited IRA accounts so that each can use their own life expectancy when calculating RMDs.<\/p>\n

Finally, keep in mind that if the deceased hadn\u2019t taken their RMD for the year yet, you must take the distribution and count it on your own tax return. \u00a0This can be easily overlooked in the wake of a loved one\u2019s death, but it is critical in preserving their legacy.<\/p>\n

Conclusions<\/strong><\/span><\/h2>\n

These rules can be very confusing, but taking time to understand them can help you avoid headaches and penalties in the future. For more reading on the subject, take a look at the Wall Street Journal\u2019s article<\/a> and their follow-up article<\/a> on the subject. For more detailed information about what you need to know about your IRA in 2012, take a look at this article<\/a>. For more details about how RMDs might affect your accounts, take a look at this comprehensive explanation of RMD rules<\/a>.<\/p>\n

Finally, talk to your tax or financial advisor about your IRA to ensure that your contributions, distributions, and inherited accounts are all in good order, and don\u2019t be afraid to ask questions! The more knowledge you have, the more powerful you\u2019ll be in building and preserving your retirement savings.
\n.
\n.<\/p>\n

To learn about retirement savings, download my free eBook, \u201c10 Tips You Need to Know About Your IRA Rollover<\/a>.\u201d This short book is packed with critical information that will help you make the right decisions about your retirement savings.
\n<\/object><\/p>\n","protected":false},"excerpt":{"rendered":"

Is your Traditional IRA or Roth IRA following all the rules? You may assume the answer is yes, but IRA mistakes are far more common than you may realize, and the IRS is gearing up to investigate and penalize them accordingly. \u00a0The Wall Street Journal reports that in 2006 and 2007 the IRS let about […]<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_publicize_message":"","jetpack_is_tweetstorm":false,"jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false}}},"categories":[13],"tags":[14,524,521,197,556],"jetpack_publicize_connections":[],"aioseo_notices":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p2p1nA-w2","jetpack_sharing_enabled":true,"jetpack-related-posts":[{"id":154,"url":"https:\/\/blog.bradpine.com\/2010\/07\/07\/early-distributions-from-your-ira-rollover\/","url_meta":{"origin":1986,"position":0},"title":"Possibilities and Pitfalls: Early Distributions From Your IRA Rollover","author":"Bradford Pine","date":"July 7, 2010","format":false,"excerpt":"Here at the Bradford Pine Wealth Group, we believe in educating and informing our clients. In addition to providing guidance on investment options and strategies, we feel it\u2019s important to include insight on the nuts and bolts of account management.\u00a0 One area that people generally don\u2019t know about is the\u2026","rel":"","context":"In "Retirement Planning"","block_context":{"text":"Retirement Planning","link":"https:\/\/blog.bradpine.com\/category\/retirement-planning\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":2506,"url":"https:\/\/blog.bradpine.com\/2015\/07\/22\/sabotaging-your-retirement-download-my-free-ebook-10-tips-you-need-to-know-about-your-ira-rollover-2\/","url_meta":{"origin":1986,"position":1},"title":"Sabotaging Your Retirement? ~ Download My Free eBook \u201c10 tips you need to know about your IRA rollover\u201d","author":"Bradford Pine","date":"July 22, 2015","format":false,"excerpt":"I\u2019ve written a free eBook called \u201c10 Tips You Need to know about your IRA Rollover,\u201d and if you\u2019ve ever wondered what to do with your retirement savings you might want to take a look! It\u2019s a comprehensive, plain-English guide that can help you to understand the options and take\u2026","rel":"","context":"In "Retirement Planning"","block_context":{"text":"Retirement Planning","link":"https:\/\/blog.bradpine.com\/category\/retirement-planning\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/blog.bradpine.com\/wp-content\/uploads\/2015\/07\/ebook-Suit1-300x200.jpg?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":678,"url":"https:\/\/blog.bradpine.com\/2011\/03\/16\/theres-still-time-to-contribute-to-an-ira-for-2010\/","url_meta":{"origin":1986,"position":2},"title":"There’s Still Time to Contribute to an IRA for 2010","author":"Bradford Pine","date":"March 16, 2011","format":false,"excerpt":"\ufeff There's still time to make a regular IRA contribution for 2010! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2010 ($6,000 if you were age 50 by December 31, 2010). Normally, your tax return must be filed by April 15.\u2026","rel":"","context":"In "Retirement Planning"","block_context":{"text":"Retirement Planning","link":"https:\/\/blog.bradpine.com\/category\/retirement-planning\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":139,"url":"https:\/\/blog.bradpine.com\/2010\/06\/09\/roth-ira-rollover-or-not\/","url_meta":{"origin":1986,"position":3},"title":"Roth IRA Rollover or Not?","author":"Bradford Pine","date":"June 9, 2010","format":false,"excerpt":"A key component to successful investing is determining how to position assets for maximum return after taxes.\u00a0 It matters not what you make; it matters what you keep.\u00a0 Did you know that as of January 2010 you are able to convert your Traditional IRA to a Roth IRA, regardless of\u2026","rel":"","context":"In "Roth IRA"","block_context":{"text":"Roth IRA","link":"https:\/\/blog.bradpine.com\/category\/roth-ira\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":2014,"url":"https:\/\/blog.bradpine.com\/2012\/10\/03\/my-new-york-daily-news-money-pros-column-the-stretch-option-for-inherited-iras\/","url_meta":{"origin":1986,"position":4},"title":"My New York Daily News Money Pros Column: The Stretch Option for Inherited IRAs","author":"Bradford Pine","date":"October 3, 2012","format":false,"excerpt":"NY Daily News Money Pros Column I was recently asked to provide advice for the New York Daily News Money Pros column, and I felt that the topic was so important that it would be great to share it with you too. Inheriting an IRA can be\u00a0confusing to even the\u2026","rel":"","context":"In "Retirement Planning"","block_context":{"text":"Retirement Planning","link":"https:\/\/blog.bradpine.com\/category\/retirement-planning\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":1721,"url":"https:\/\/blog.bradpine.com\/2012\/02\/03\/5-things-you-must-know-about-your-old-401k-or-existing-ira\/","url_meta":{"origin":1986,"position":5},"title":"5 Things You Must Know About Your Old 401(k) or Existing IRA","author":"Bradford Pine","date":"February 3, 2012","format":false,"excerpt":"1)\u00a0 Your old 401(k) is not being managed by the best of the best! 401(k) accounts are great for many things while you\u2019re still employed with your current company, like high contribution limits and matching employer contributions. However, they are usually pretty poor when it comes to choosing investment managers\u2026","rel":"","context":"In "Retirement Planning"","block_context":{"text":"Retirement Planning","link":"https:\/\/blog.bradpine.com\/category\/retirement-planning\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/posts\/1986"}],"collection":[{"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/comments?post=1986"}],"version-history":[{"count":0,"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/posts\/1986\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/media?parent=1986"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/categories?post=1986"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.bradpine.com\/wp-json\/wp\/v2\/tags?post=1986"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}