written by Jennifer Cochran

Jennifer Cochran blog photoThis article will be split into two posts. To read our introduction to this Retirement Series, click here.

Individual retirement accounts (IRAs), both traditional and Roth IRAs, are among the most popular retirement savings vehicles today. While some factors affecting the value of your retirement savings may be out of your control, there are many things within your control that can help you safeguard the wealth of those accounts and further their growth. This article addresses common mistakes regarding IRA distributions and contributions, and how to avoid them.

Making excess contributions
It’s important to know the maximum amount that you can contribute to your IRA to avoid negative tax consequences. A 6-percent excise tax applies to any excess contribution made to a traditional or Roth IRA. In 2013, individuals can contribute up to $5,500 to both traditional and Roth IRAs. If you were age 50 or older before 2014, the most that can be contributed to your IRA for 2013 will be 6,500.

The 6% excise tax will not apply if the excess contribution plus the income earned on it is withdrawn by the due date, including extensions, of the tax return for the year the excess contribution was made. The excess amount that is withdrawn is not included in gross income provided no deduction was claimed for it. However the income earned must be included in gross income, and may also be subject to the 10% tax on early withdrawals if the taxpayer is under age 591/2.

Not contributing enough
There are no penalties from the IRS for not contributing enough to your IRA. Failing to contribute the maximum allowable amount means you are missing out on tax deductions in addition to tax-deferred, or tax free earnings.

Not taking your RMDs
Annual required minimum distributions (RMDs) from traditional IRAs, SIMPLE IRAs and SEP IRAs must begin starting for the year the taxpayer reaches age 701/2. Taxpayers can delay receipt of the first distribution until April 1 of the following year they turn 701/2. Distributions thereafter must be made by December 31 of that year.

If you fail to take a RMD, or fail to take the correct amount for the year, the IRS imposes a 50 percent penalty tax on the difference between the actual amount you withdrew and the amount that was required. This is a stiff penalty to pay. If an RMD is required from you IRA, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the RMD to you, or offer to calculate it for you. The report or offer must include the date by which the amount must be distributed. The report is due January 31 of the year in which the minimum distribution is required.

Stay tuned for part two of this article. If you have any questions about this topic, please contact us at 417-881-0145.