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Individual retirement accounts (IRAs)are among the most popular retirement savings vehicles today. This article addresses common mistakes regarding IRA distributions and contributions and how to avoid them.
Making excess contributions to your IRA accounts
Individuals can contribute up to $5,000 to both traditional and Roth IRAs. Individuals age 50 or older can also make "catch-up" contributions of up to $1,000 to their IRAs in 2010. If you withdraw the excess contribution amount on or before the due date (including extensions) for filing your federal tax return for the year, you will not be treated as having made an excess contribution and the 6% excise tax will not be imposed. You must also withdraw any earnings on the contributions as well.
Not contributing enough to your IRA accounts
On the other hand, you may be contributing too little to your IRA. There are benefits to making the maximum contribution. Contributing the maximum amount means larger tax-free or tax-deferred growth opportunity and a higher account value upon retirement. Thus, failing to contribute the maximum allowable amount means you may be missing out on tax deductions in addition to tax-deferred, or tax-free earnings.
Not taking your required minimum distributions
Required minimum distributions (RMDs) are minimum amounts that a traditional IRA account owner must withdraw annually beginning with the year that he or she reaches age 70 1/2. If you fail to take a RMD, or fail to take the correct amount for the year, the IRS imposes a 50% penalty tax on the difference between the actual amount you withdrew and the amount that was required.
Failing to rollover IRA funds within 60 days
If you receive funds from an IRA and want to roll over the money to another, you have only 60 days to complete the rollover in order to escape paying taxes on the transaction. If the funds are not rolled over within this timeframe, the amount is considered taxable income, subject to ordinary income tax rates. And, if you are younger than age 59 1/2, you may pay an additional 10 percent tax.
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