Retirement Plan Tax-Prep Checklist

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Retirement Plan Tax-Prep Checklist

Individual retirement accounts (IRAs) and qualified retirement plans (QRPs) enable you to save for retirement tax-free. Contribution earnings increase tax-deferred or tax-free in Roth IRAs and Roth 401(k)s. When it comes to tax season, make sure you are up to speed on all obligations.

Key Takeaways

  • Qualified plans, like IRAs, provide tax benefits such as tax-deferred or tax-free earnings growth.
  • Contributions to qualified plans must be submitted by particular dates. For example, IRA contributions must be made before the tax filing date (usually April 15).
  • If you or your spouse is covered by a retirement plan at work, your modified adjusted gross income (MAGI) may limit or eliminate the deduction for IRA contributions.
  • When you reach the age of 72, you must begin taking required minimum distributions (RMDs) from your IRAs and other retirement accounts.

Watch the Contribution Deadline

You may contribute to an IRA or a Roth IRA until the tax filing deadline. Even if you receive a filing extension for your tax return, you don’t have extra time to make IRA contributions.

However, if you own a company, you may contribute to a qualified retirement plan until the return’s delayed due date (e.g., Oct. 17, 2022, for a 2021 contribution).If you didn’t, you still had time to set up and fund a SEP IRA by the delayed due date of your tax return.

Use Tax Refunds for Contributions

If you are due a tax refund, you may put it toward an IRA or a Roth IRA contribution. If you file your tax return in time, the IRS will transfer the cash to your account’s custodian or trustee for the 2021 tax year; make careful to advise your custodian or trustee that you want the monies used for 2021. Fill out Form 8888 to instruct the IRS where to mail your refund. If funds come late or you fail to notify the custodian or trustee that you want them used for 2021, they may be applied for 2022.

Fix Excess Contributions

For 2021 and 2022, the IRA contribution maximum remains $6,000 (or $7,000 if you are 50 or older).

If you or your spouse participate in a qualified retirement plan at work, such as a 401(k), your modified adjusted gross income (MAGI) may reduce or eliminate the deduction for contributions to conventional IRAs. Regardless of other plans, your MAGI may decrease or prohibit contributions to Roth IRAs. Any excess contributions (amounts greater than your eligibility) are subject to a 6% penalty each year until you fix the situation.

  Energy Tax Definition

The excess contribution penalty cannot exceed 6% of the total value of your IRAs at the conclusion of the tax year.

If you donated too much to any of your IRAs, don’t put it off. If the extra contribution is to a conventional IRA, be sure you don’t deduct it. To avoid the 6% penalty, if you discover the mistake before completing your tax return, remove the excess contribution (plus any gains) no later than the tax filing date. If you’ve already filed, you must delete the excess contribution and profits within six months and submit an updated return by the October deadline extension.

If you miss the deadline, withdraw the excess (even after Oct. 15) and deduct the excess from next year’s contributions. Remember that any profits you remove from your IRA are taxed as regular income, and you may be subject to a 10% early withdrawal penalty if you are under the age of 5912.

Take Required Minimum Distributions

Tax deferral does not persist indefinitely. Check to see when you must begin taking the minimum distributions (RMDs).The IRS levies a 50% penalty on any missed RMDs, which means you’ll repay half of the amount you should have withdrawn.

RMD regulations are complicated, but here’s a primer to get you started.

  • Roth IRAs have no RMD requirements throughout the account owner’s lifetime. If you don’t need the money right away, you may leave it alone and let it grow tax-free for your heirs.
  • For your own use. You must begin taking RMDs by April 1 of the year after your 72nd birthday (or 7012 if you reach that age before January 1, 2020). The RMD is calculated using IRS tables, which may be found in IRS Publication 590-B. If you are married, your spouse is more than 10 years younger than you, and they are the sole beneficiary of the account, use Table II; otherwise, use Table III (Uniform Lifetime).
  • For inherited benefits from an IRA or a qualified retirement plan. The regulations vary according to your connection with the account holder. If you are a surviving spouse, you have the option of transferring the benefits to your own account and treating them as if they were always yours. As an example, if you’re 60 and inherit an IRA from a spouse who died in 2021, a rollover allows you to postpone RMDs until you’re 72. If you are not the owner’s surviving spouse, you must normally accept a distribution of the whole amount before the end of the tenth calendar year after the owner’s death.
  The 20/10 Rule of Thumb

Other prominent exceptions to the 10-year limit for qualified designated beneficiaries include the owner’s small child, a crippled or chronically sick beneficiary, and any other beneficiary who is no older than 10 years old.

As a consequence of the SECURE Act, which was approved in 2019, the age limit for RMDs was raised from 7012 to 72 for those whose 70th birthday is on or after July 1, 2019.

Provided you failed to take RMDs, you may be eligible for relief if you can demonstrate reasonable cause for your failure. You are not required to pay the penalty right away, but you must submit Form 5329 with your tax return and provide an explanation for your omission (e.g., you had a severe medical condition or received bad tax advice about how much to take).Furthermore, you must demonstrate that you took the RMD as quickly as possible. Form 5329 instructions describe what to do.

Protect Yourself if You Took Distributions Before Age 59½

Even if you weren’t obliged to take distributions, you could have done so because you needed the money before reaching retirement age. The distribution is fully taxable in most cases (other regulations apply to Roth IRAs and nondeductible IRAs) and is reported to you on Form 1099-R. Furthermore, unless you qualify for an exemption, if you were under the age of 5912 at the time, you will be punished 10%.

Because to the 2020 pandemic-related economic crisis and its significant financial effect on many American households, the regulations for early retirement account distributions for the 2020 tax year have been amended. As long as they were eligible for stimulus payouts, qualifying people may borrow up to $100,000 or 100% of the vested amount in their retirement accounts (whichever was less). The payout is taxable, however taxes may be spread out over three years rather than being owed all at once in 2020.

If a taxpayer returns the money to the plan within three years, the transaction is deemed a rollover and is not taxed. The CARES Act also permits taxpayers to postpone payments on past outstanding retirement account loans for up to one year.

If you qualify for an exemption in regular (non-COVID) years, you may escape the penalty but not the tax on the payout (the IRS lists the acceptable reasons).If you wish to depend on an exception, gather your evidence immediately. If you are handicapped, for example, make sure you have evidence from physicians or the Social Security Administration proving that you are completely and permanently unable to participate in any serious gainful activity. If you used the money to pay for eligible higher-education expenditures for yourself, your spouse, or a dependent, save all receipts.

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What Is the RMD Age?

The Required Minimum Distribution (RMD) laws were altered by the Setting Every Community Up for Retirement Act of 2019 (SECURE Act). RMDs must be started before April 1 of the year after your 72nd birthday. If you turned 7012 in 2019, the previous regulation still applies, and you must have taken your first RMD by April 1, 2020. RMDs are not required for Roth IRAs throughout the account owner’s lifetime.

What Is the Deadline for Contributing to an IRA?

Contributions to your Roth or regular IRA are normally allowed until the tax filing deadline, which is usually April 15. That means you have until April 15, 2022, to contribute to your IRA for the tax year 2021. If you make a donation between January 1 and April 15, be sure to mention which tax year the contribution is for. Otherwise, the contribution may be applied to the current tax year by your account custodian.

The deadline for IRA donations for the tax year 2021 is Monday, April 18, 2022.

How Do I Correct an Excess IRA Contribution?

If you contribute more to your IRA than is permitted, you may be subject to a 6% penalty each year until you correct the error. If you discover your error before completing your income tax return, you should remove the extra contribution and profits (you still have to declare the earnings as income on your taxes).If you’ve already submitted your return, you must eliminate the excess contribution and profits and file an updated return by the October extension deadline.

The Bottom Line

The regulations governing retirement funds are complex and change on a regular basis. Speak with your plan administrator or IRA custodian, or even better, your tax counselor, for assistance.

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