When it comes to saving for retirement, qualified retirement plans and IRAs offer the benefit of tax-deferred earnings growth. Roth IRAs and Roth 401(k)s go a step further, allowing for tax-free growth of funds. But adhering to contribution timelines and limits while staying abreast with current tax laws and requirements is paramount.
Remember, you have until the tax filing deadline to contribute to an IRA or a Roth IRA. Don’t be mistaken to think you get more time with a tax return filing extension. However, if you own a business, deadlines for contributing to a qualified retirement plan sync up with your return's extended due date.
Received a tax refund? Consider applying it to your IRA or Roth IRA contribution. Use IRS Form 8888 to give directions on where to send your refund, and remember to notify your custodian or trustee about your plans. Take note though, if funds arrive late or instructions are not clear, your contribution might be pushed to the following year.
Individuals can contribute up to $6,500 to their IRA in 2023, with those 50 or older getting a limit of $7,500. In 2024, these figures rise to $7,000 and $8,000 respectively. But your exact capabilities can be influenced by your modified adjusted gross income (MAGI). Excessive contributions to either traditional or Roth IRAs even with a high MAGI attracts a 6% penalty till you make required amendments.
Fumbling on your Roth IRA contributions? Delay not in correcting things. If the excess contribution applies to a traditional IRA, don't even think about deducting the contribution. The key is to act promptly in withdrawing the excess contribution, ideally before filing your tax return. If you’ve already filed, you have up to six months to rectify the problem by removing the excess contribution and filing an amended return.
Remember, earnings withdrawn from your IRA will be taxed as ordinary income, and can attract a 10% early withdrawal penalty if you're younger than 59½. Looking to avoid this? Then ensure to understand when you must start taking required minimum distributions (RMDs). A missed RMD attracts a hefty 25% tax.
RMD rules can be complex. A few things to note are the exceptions to the 10-year rule for eligible designated beneficiaries such as a minor child, a disabled or chronically ill beneficiary, or another beneficiary who is not more than 10 years younger than the original owner.
If you failed to take RMDs, relief may be available by showing reasonable cause for your failure. IRS Form 5329 can be used to explain your reason, like a severe medical condition or receiving incorrect tax advice. Ensure you demonstrate that you took the RMD as soon as you could.
Do be aware of rules applying to distributions taken from a Roth IRA and non-deductible IRA. Fully informed decisions aid in avoiding surprises when making withdrawals before the age of 59½.
Post-2020, CARES Act has allowed for flexible rules around early retirement account distributions. This came as the economic crisis caused by the pandemic-induced financial woes. Qualified individuals during the crisis were allowed to borrow up to $100,000 from their retirement accounts, taxable over three years. The act also allowed a taxpayer to delay payments on any prior outstanding retirement account loans.
Managing retirement accounts gets complicated, and the rules don't always stay the same. Discuss with your plan's administrator, IRA custodian, or better yet, your tax advisor to optimise your retirement contributions and avoid any unwanted surprises during tax time.