Everyone should be updated on the IRS’ attempts to crack down on IRA account owners who are either over-funding their accounts (through excessive contributions) or not taking out RMDs. RMDs are Required Minimum Distributions and must be taken from IRA accounts by April 1 of the year following someone turning age 70.
You might think that between audits and implementing the reporting and oversight of the new health care plan (you should read some posts on that, by the way), the IRS may be too busy with issues such as as these two topics. However, when one considers the need to collect more taxes, potential intentional or unintentional abuses with IRA plans may be one of the first places the IRS goes a lookin’.
So, let’s break down each one:
Excessive Contributions Made to IRAs — With approximately 50 million households owning IRA plans, the IRS is not collecting taxes on many plans where individuals are over-funding their accounts OR making contributions that are deemed excessive due to the income received by the account holder. If making excessive contributions, one can face a pretty significant penalty. How much of a penalty, you ask?! Try 6% of the amount that was over the limit. That is more than what a lot of people are currently earning as an investment within their plan….and, oh by the way, that penalty goes back to every year in which excessive contributions occurred. Still think that statistic isn’t sufficient for the IRS to do anything about the matter? Well, consider this….in 2010 study, the IRS found that over 300,000 individuals over-funded IRA accounts to the tune of 1.6 billion dollars during the 2006 and 2007 tax years. Do you think the IRS may want their share of that amount?!
RMDs (Required Minimum Distributions) — The penalty for not taking RMDs is much stricter than over-funding your IRA. Try a 50% tax penalty on the amount that an individual should have withdrawn. Yikes, that is a pretty stiff penalty. Oh, and by the way, there are no statue of limitations on the time that the IRS can go back to determine what they should have been paid taxes on with RMDs.
Finally, is this just banter? Well, considering the fact that the IRS is reporting to the Department of Treasury by October 15, 2012 how it plans on going after individuals who have over-funded or not taken their RMDs…I guess they are taking it seriously!
Whether you have a Traditional, SEP, Roth or SIMPLE or any self-directed IRA it might not be a bad time to re-visit your plans as you near retirement. As always, if you feel that you may have over-funded an IRA or have not taken your appropriate RMDs, you should consult with your tax professional as to options you may have.