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February 28, 2017

Avoid Penalties With Your IRAs


by Denise Appleby

Amounts you save in your IRA can be diminished by penalties and excise tax. For instance, failing to take required minimum distribution (RMD) amounts could result in you owing the IRS an excise tax of 50% of the amount you did not take. Below, we provide some tips on how you can prevent yourself from being subject to IRA penalties and certain excise taxes.

10% Early Distribution Penalty

While savings in IRAs are usually intended to cover expenses during retirement, circumstances may make distributions before retirement necessary. If these distributions occur before you reach age 59½, you will owe the IRS an early distribution penalty of 10% of the amount, unless you qualify for an exception.

The following are a few of these exceptions:

  • The distribution is due to an IRS levy on your IRA;
  • The distributions occur while you are disabled;
  • The distribution is received under a substantially equal periodic payment (SEPP) program; otherwise referred to as a 72(t); or
  • The distributions are not more than your qualified higher-education expenses.

You may need to meet certain requirements in order to be eligible for these exceptions. Further, if you are not eligible for these exceptions, you may be eligible for others. If you are under age 59½ and are considering making a withdrawal from your IRA, we can help you to determine if you qualify for an exception.

6% Excise Tax

Amounts that you add to your IRA are subject to certain limits. The amount you add as contributions for this year cannot exceed the limit in effect for the year. For traditional IRAs, no contributions are permitted for the year that you reach age 70½ and after; for Roth IRAs, no contributions are permitted if your modified adjusted gross income (MAGI) exceed certain amounts. Click here for limits

Additionally, amounts that you add as rollover contributions cannot exceed amounts that are eligible for rollover.

If your additions to your IRA exceed the allowable amounts, these excess amounts will be subject to a 6% excise tax for every year that they remain in your IRA, unless corrective action is taken on a timely basis. If you are considering rolling over amounts from your 401(k), 403(b), pension or other retirement account to your IRA, we can help you to determine whether the entire amount is eligible for rollover.

50% Excess-Accumulation Penalty

If you are at least age 70½ by the end of this year, you may need to take an RMD amount from your IRA for the year. If you have IRAs that you inherited, you may also need to take RMD amounts from those accounts. RMD amounts must usually be taken by the end of the year for which the RMD is due. An exception applies to the year that you actually reach age 70½. Under this exception, your deadline is extended until April 1 of the following year.

If you fail to take your RMD by the deadline, you will owe the IRS an excess accumulation penalty of 50% of the RMD shortfall.

Avoid Paying Penalties

Your IRA transactions must be handled with care, and they will often require the assistance of an IRA expert to help ensure that penalties are avoided where possible and that excise taxes are not incurred. There is no question too simple when it comes to your IRAs. To help ensure that you receive the right information about the rules that apply, please contact our office with your IRA questions.



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