How to Avoid April IRA Errors
When April comes each year, taxpayers are thinking about filing their tax returns. They are thinking about where to find the money to pay balances due. They are planning already how to spend the refund before the check even arrives. IRAs are way down on the list at best. Worst, they are forgotten. Below are some reminders about IRA deadlines and actions to be taken. There is a lot more to think about, be cognizant of, and avoid making critical errors.
Deadline for Making IRA Contributions
IRA contributions on account of the previous year must be made by April 15th.. There is no extension for IRA contributions. It doesn’t matter that the tax return may have been put on extension. Miss the April 15th deadline and you miss multiplying a $5,000 contribution into thousands of dollars, many times larger than can be imagined.
Required Minimum Distributions
If you turned 70 ½ in the prior year, then April 1st is the last day that you can take your required minimum distribution (RMD) from your traditional IRA account, including any nondeductible accounts. If you miss the RMD on April 1st, it is an automatic 50% penalty assessed on the RMD amount you should have taken. That is a stiff penalty, and as you know, penalties are nondeductible. The penalty can be and is assessed for each year the RMD is missed. That can really add up. Worse, if you have to liquidate more of your IRA to pay the penalties, the “stretch” IRA is in danger of being really squeezed.
Year of Death Distribution
When an IRA owner dies after his or her required beginning date (RBD) for taking IRA distributions, the RMD for the year of death may not have been taken. Who takes it…the estate or the beneficiary? Tax law has answered this question. It is the beneficiary, unless of course the estate was named the beneficiary. The beneficiary must report it as income on his or her return. The question is does the beneficiary even know about it? As far as we can tell, the distribution must be taken before the end of the year in which the IRA owner died. The RMD is based on the Uniform Lifetime Table, which the deceased IRA owner used.
When an IRA owner dies before his or her RBD for taking IRA distributions,
Return of Contributions
Suppose something came up after you made the contribution for the prior tax year. Now you need the money back. There’s a solution to that problem. You can withdraw the contribution tax-free if done before the April 15th deadline for filing the return. In this case, if the return is extended, you have until the filing date of the return to withdraw the prior year’s contribution.
Nondeductible IRA Form 8606 Filing Requirements
Whenever a contribution is made to a nondeductible IRA, the cost basis or contributions must be tracked. The IRS provides Form 8606 for this purpose. It is completed and filed with the return on or before April 15th, and may be filed with an extended return. So while April 15th is not necessarily the deadline for filing this form, it serves to remind the IRA owner that April is the month for dealing with this filing requirement. Failure to file the form results in a $50 penalty per form.
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