The Complexities of IRAs

The IRS decided recently to increase its enforcement of the tax penalties that incur from IRA mistakes. It is important for financial advisors to take note of this event. In the past the government has not collected millions in tax penalties that it would otherwise receive from the mistakes that owners of IRAs make each year. This could become a problem because a good number of people and households in the United States own an IRA.

What makes the situation worse is that the penalties are tough. For example, IRA accounts require that a person begin to withdraw minimum distributions at age 70.5. If a person fails to do so, then the IRS can hit that person with a tax penalty of up to 50% of what the party should have withdrawn. Furthermore, there are other rules that make this basic concept more difficult. For example, if a person has a smaller IRA, then that might not have to make withdrawals at age 70.5 if Congress passes a bill that was introduced early this year. There is also a snag with 401(k)s. If a person owns a 401(k) and is still working with a company that he or she owns less than 5% in, then that person does not have to make withdrawals. However, if that person were to transfer the money to an IRA, then that person would have to take withdrawals.

IRA owners might also want to be aware that the IRS is looking at contributions to whether taxpayers are making contributions that exceed the contribution limitation. There are also rules that govern inherited IRAs that the beneficiaries of those IRAs might be unaware of. Therefore, attorneys, accountants, and other financial planners might want to consider reviewing the rules and regulations on IRAs to ensure that their clients do not get caught in one of these legal loopholes. The “deadline” to check on these rules is October 15.

See Kelly Greene, IRA Rules Get Trickier, Wall Street Journal, June 22, 2012.

Special thanks to M.D. Anderson (www.InheritedIRAHell.com) for bringing this article to my attention.