Denice R. Preston
The earnings on contributions grow tax-deferred or free of taxes for Roth IRAs and Individual Retirement Accounts (IRAs). The payments on your contributions will grow in a tax-deferred manner or tax-free if you have Roth IRAs. Roth-401(k)s.
Takeaways from the Key Notes
Tax advantages are available with qualified plans such as IRAs. These include tax-deferred and tax-free growth of earnings.
Contributions to qualified plans must be made before specific deadlines. Contributions to IRAs, for instance, must be made before the deadline for filing taxes (usually April 15).
If a pension plan at work covers you or your spouse, then the modified adjusted gross (MAGI) can reduce or even eliminate any deductions for IRA contributions.
If you were born between 1951-1959 or 1960 or later, the required minimum distributions are due when you turn 73.
Use Tax Refunds to Contribute
You can use a tax refund to contribute to an IRA, Roth IRA, or savings account. If you file your tax return by the deadline, the IRS will send your funds to the account custodian. Tell your trustee or custodian you would like the money applied to the 2022 tax season. You can tell the IRS to send you your refund using Form 888. If you do not disclose to your custodian that you wish to use the funds for 2022 or if you arrive with late funds, you may be forced to use them in 2023.
Fixing Excess Contributions
For 2023, the limit will be $6,500 (or $7.500 if you’re 50 years old). In 2023 it will be $6,500. ($7,500 for those over 50).
Suppose you or your spouse are enrolled in a qualified retirement program, such as a 401 (k) through work. In that case, you can reduce or eliminate the contribution deduction for traditional IRAs. Your MAGI may also ban or reduce contributions for Roth IRAs, regardless of other plans. Any excess contributions–amounts higher than you are eligible to make–are subject to a 6% penalty each year until you take corrective action.7
The excess contribution fee must be at most 6% of your total IRA value at the end of the tax year.
Don’t wait to fix the problem if you have contributed too much money to your IRAs. Be sure not to deduct any excess contributions made into a traditional IRA. You can avoid the penalty by withdrawing the excess contribution and any earnings before the deadline for filing your tax returns. If you have already filed your tax return, remove any excess contributions and payments within six months and submit an amended return before the October deadline.
8 10 If you are younger than 59 1/2, you might owe a 10% penalty for early withdrawal.
Require Minimum Distributions
Tax deferral only lasts for a while. You must know when to start taking Required Minimum Distributions (RMDs). If you fail to take your RMDs, the IRS will impose a 25% penalty. This means you’ll be liable for a fine equal to one-quarter of what you should have taken out.
RMD rules can be complex. Here’s a little information to help you get started.
Roth IRAs do not require RMDs to be taken during the owner’s life. You can leave your account alone if you don’t need the money and let it grow for your heirs tax-free.
You can use your account. RMDs must be taken by April 1 following your 73rd birthday (for those born between 1951-1959) or 75th birthday (born after 1960). RMD amounts are based on IRS tables found in IRS publication 590-B. If you’re married and your spouse is younger than you by more than ten years, you should use Table II (Joint life and last surviving expectancy). Otherwise, it would be best if you used Table III.
The rules are different if you inherit benefits from a retirement plan or IRA. You can transfer the benefits into your account as if you had always owned them. If you inherit an IRA in 2021 from a deceased spouse, you can defer RMDs to age 73 by rolling over the IRA. You must generally take the entire balance of an IRA if you are not the surviving spouse by the end of the 10th year following the owner’s death.
The 10-year rule does not apply to designated beneficiaries who are the minor children of the owner.
You may be eligible for relief if you show a reasonable reason for not taking RMDs. You do not have to pay a penalty up front, but you must file form 5329 along with your tax return. Explain why you failed to take RMDs (e.g., you suffered from a severe medical condition or received incorrect tax advice on how much you should take). You must also show that you have taken the RMD within a reasonable time frame. Instructions for Form 5329 describe what you should do.
Protect yourself if you take distributions before age 59 1/2
The distribution is generally fully taxable (different rules apply to Roth IRAs and nondeductible IRAs), and reported to you on distribution is generally fully taxable. (Different rules apply to Roth IRAs and nondeductible IRAs.) It will be reported to you in Form 10-R.
The rules for early retirement accounts were changed due to the economic crisis caused by the pandemic in 2020 and the financial impact it may have on American families. The CARES Act allows qualified individuals to borrow $100,000 or up to 100% of their vested retirement account balance (whichever was smaller) as long as they are eligible for stimulus distributions. The distribution is taxed, but the taxes can be spread out over three years rather than being due in full by 2020.
The CARES Act allows a taxpayer to defer payment on any previous outstanding retirement account loan for up to a year.
You must have proof of your exemption to claim it. If you’re disabled, you should have evidence from your doctor or the Social Security Administration that you can no longer engage in substantial gainful activities. You must have receipts if you paid higher education costs to yourself, a spouse, or a dependent.
