Fix These IRA Bugs by April 15
If you are working on your 2018 tax return, you need to make sure you double-check your IRA contributions and annual payments to avoid incurring the ire of the IRS (well, a fine anyway).
Specifically, as reported by CNBC , there are two things to look for: have you taken the required minimum allocation (RMD) if you are at least 70½, and if you have contributed too much.
Skipping your RMD
The lack of RMD in traditional IRA is a particularly costly mistake. The IRS will charge you 50 percent of the payment on top of other taxes if you do not charge. Kiplinger explains what it actually looks like:
If you had a $ 200,000 IRA and were 72 years old, your RMD would be approximately $ 7,813. If you somehow missed this mandatory allocation, you could pay a $ 3,907 fine to the IRS.
However, this is easy to fix, especially if you catch it now. You should proceed with distribution immediately and then you will want to file Tax Form 5329 Additional Taxes on Eligible Plans (Including IRAs) and Other Income Tax Accounts. Make sure you are requesting a cancellation of the fine (this will be done if the IRS considers it a reasonable mistake) and attach a letter explaining what happened. Kiplinger says there is no real indication of what the IRS will take as “reasonable,” but there is a “good chance” that it will.
To avoid this in the future, talk to your account keeper about automatic payments on set dates. (And note that there are no required minimum distributions for Roths.)
Too Much Savings
For 2018, the contribution limit for an IRA or Roth was $ 5,500, or $ 6,500 if you’re 50 or older. If you have contributed more than that, or are 70.5 years old or older, and have contributed at all to a traditional IRA, you face a six percent tax penalty .
Perhaps you accidentally deposited more than this amount simply because you forgot or because you did not know the rules. If you have Roth, it is possible that a change in income – such as a bonus or promotion at a new job – will lead you to exceed your income limit . Whatever the reason, if you notice this before filing your tax return, you can revoke excess contributions and any income before taxes are due.
“If you remove excess contribution plus profits by the April 15th or October 15th deadline, profits will be taxed as regular income,” writes Vanguard . “And if you are under 59.5 years old, you will be subject to a 10 percent early withdrawal penalty.”
Otherwise, you can also reduce this year’s IRA / Roth contributions by the amount you contributed above the 2018 threshold. “For example, if your limit is $ 6,000 and you exceed it by $ 1,500 this year, you can offset the excess by limiting your contributions to $ 4,500 next year,” says Vanguard. But you have to pay a six percent fine until you fix the situation.
If you have a Roth and you decide to specifically limit the income problem, RothaIRA.com recommends re-characterize the fee as a regular fee IRA (note: total limit for 2018 remains at 5500 dollars, that’s only if your income puts you above Roth’s threshold of $ 199,000 for joint applicants and $ 135,000 for singles).
If you’ve saved too much by miscalculating the amount of the premium for each billing period, it’s easy to fix in the future – work with your service agent to automate the exact installments. Just remember, this year’s contribution limit is $ 500 more than 2018 .