IRAs are usually a major component of people’s wealth. While 100% of funds in traditional, SEPP-IRAs, and Rollover IRAs will ultimately be subject to income taxation, oftentimes mistakes are made which result in unnecessary taxes being paid, or in having income taxes assessed earlier than necessary. Here are some common mistakes I see.
FAILING TO WITHDRAW MINIMUM REQUIRED DISTRIBUTIONS: Once an IRA owner becomes 70.5, distributions are required. If too little is taken from an IRA, a penalty tax equal to 50% of the shortfall results. Distributing too little often occurs when people have multiple IRA accounts.
NAMING AN ESTATE AS AN IRA BENEFICIARY: Naming an estate as an IRA beneficiary requires funds in an IRA to be distributed more rapidly than if a “qualified designated beneficiary” had been named, such as a spouse, child, grandchild, parent, brother/sister, niece/nephew, neighbor, or certain types of trusts.
UNNECESSARY ACCELERATION OF IRA DISTRIBUTIONS: Occurs when a qualified designated beneficiary inherits an IRA, but then takes a distribution based upon the age of the decedent rather than the age of the beneficiary.
IMPROPER TITLING OF AN IRA: If a beneficiary (other than a surviving spouse) rolls a decedent’s IRA into his or her own IRA, the contribution will be treated as an excess contribution. A 6% tax will be imposed and the entire amount rolled over into the IRA will be subject to income tax. To avoid this result, an inherited IRA should be established titled as follows: “John Jones, deceased, traditional IRA for benefit of Jim Jones.”
MISSED 60 DAY ROLLOVER: This problem has been reduced over the years due to the ability to do direct rollovers of qualified plan balances to IRAs and trustee to trustee transfers of IRAs. But you’d be surprised at how many people take distributions from IRAs and then fail to recontribute the distribution within 60 days. Not doing so results in the entire distribution being subject to income tax and potentially penalty tax.
SPOUSAL ROLLOVER TRAP: A surviving spouse has the option of rolling over an IRA into their own IRA or establishing an inherited IRA. If the surviving spouse is younger than the deceased spouse, it may be wise to set up an inherited IRA, even though distributions would be required each year.
Christopher J. Maurer, J.D., CFP® is a CERTIFIED FINANCIAL PLANNER™ in Bellaire, with over 20 years of experience. He can be reached at 713-667-4884 or cmaurer@parkplacefinancial.co. This material is intended for educational purposes only. Please consult your investment professional or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Securities and advisory services offered through SagePoint Financial, Inc., member FINRA/SIPC. Insurance services offered through Park Place Financial, which is not affiliated with SagePoint Financial or registered as a broker-dealer or investment advisor. SagePoint Financial, Inc. does not offer tax or legal advice. Legal advice provided by Christopher J. Maurer. 6750 West Loop S, Suite 920, Bellaire, Texas 77401 (713) 667-4884.