Remedying Common IRA Contribution and Withdrawal Errors to Avoid IRS Penalties and Plan Disqualification

Description

The most frequent IRA error is likely the dreaded over-contribution which can happen in a multitude of ways. The taxpayer may exceed the annual maximum ($6,000 for 2019; plus the $1,000 age 50 catch-up), roll in an ineligible contribution, make a contribution after the 60-day replacement window has passed, or contribute to an IRA though the taxpayer is ineligible. In these cases, if the excess isn't withdrawn by the tax filing deadline, the 6% excess contribution penalty is assessed on the excess and its relative earnings, until withdrawn, which can significantly deplete the retirement account.

Another common error with severe consequences is the missed RMD distribution which carries a hefty 50% excess accumulation penalty that compounds each year an RMD isn't taken. Not as common but still egregious are prohibited transactions, pledged IRAs, failed conversions and other transactions that jeopardize the non-taxable nature of these retirement accounts.

In addition to mistakes, there are intentional early distributions. These are subject to an early withdrawal penalty of 10% with certain exceptions, including age, medical expenses, first-time home buyer, payments spread under 72(t) and more. Each of these exceptions has its own set of qualifications to avoid the penalty.

Listen as our panel of experts walk you through how to handle taxpayer IRA snafus, the resulting penalties and perhaps avoid the penalties entirely.