Avoid These Common IRA Withdrawals & Contribution Errors
Let’s discuss some of the most common IRA contribution errors and how to avoid them.
Excess Contributions: For 2019, the total amount you can contribute to all your IRA accounts is $6,000. If you are 50 or older, you can contribute an additional $1,000 to catch up. If you are 70 ½ years or older, you can no longer contribute to a traditional IRA but can contribute to a Roth IRA.
Roth vs. IRA Contributions: For many reasons, Roth and traditional IRAs are not created equal. One common error that people make is contributing to their Roth without realizing there is an income cap on contributions.
Required Minimum Distributions: Once you reach age 70 ½, you must start withdrawing a minimum portion of your traditional, simplified employee pension (SEP), or savings incentive match plan for employees (SIMPLE) IRAs. This amount is called a required minimum distribution, or RMD.
Beneficiaries: You can name almost anyone a beneficiary of your IRA accounts. If you inherit an IRA, you cannot contribute to it. If you mistakenly contribute to the inherited account instead of your own, you then make the entire amount taxable.
Prohibited Transactions: There are certain transactions that may be prohibited in an IRA account. This extends not only to the owner, but the family, beneficiary, and fiduciary.
Prohibited transactions can include the following:
- Selling property to the IRA
- Borrowing money from the account
- Using it as collateral for a loan
- Using funds to purchase personal property
If a prohibited transaction is found, the account will cease to be an IRA as of January 1st of that year, and the money will be considered taxable income.
Avoid the Early Withdrawal Penalty: If you plan to withdraw funds prior to turning 59 ½, there are a few ways to avoid the 10 percent withdrawal penalty. You can use the funds for any of the following reasons:
- Health insurance premiums
- Medical expenses
- First home purchase
- Funding college
- Military service
- Rollover to qualified account
The RMD Waiver: If you are requesting a waiver and/or paying a penalty for a forgotten RMD, you will have to complete IRS Form 5329 to attach to your tax return. If you are requesting a waiver, then you must send a letter of explanation along with your tax return and the completed form.