Retirement Plan Tax Prep Checklist

Qualified retirement plans and individual retirement accounts (IRAs) enable you to save for retirement while minimizing your tax burden. Earnings from contributions grow tax-deferred or tax-free in Roth IRAs and Roth 401(k)s. When it comes to tax time, be sure you are up to speed on all regulations.

KEY TAKEAWAYS

• Qualified plans, such as IRAs, offer tax benefits like tax-deferred or tax-free earnings growth.
• Qualified plan contributions must be made by particular dates, which are typically the same as the tax filing date (April 15).
• If you or your spouse are covered by a workplace retirement plan, your modified adjusted gross income may reduce or eliminate the deduction for IRA contributions.
• You must begin taking required minimum distributions from your IRAs and other retirement plans at the age of 73 or 75, depending on your birth year.

Check The Contribution Deadline

You have until the tax filing deadline to make contributions to an IRA or Roth IRA. Even if you gain a filing extension for your tax return, you will not be given more time to make IRA contributions.

However, if you own a business, you can contribute to a qualified retirement plan until the delayed due date of your return. In 2023, the deadline was October 16. If you didn’t, you might still open and fund a SEP IRA by the delayed due date on your return.

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Use Tax Refunds For Contributions

If you’re due a tax return, you can use it to contribute to an IRA or a Roth IRA. This can be for the current tax year if you file your tax return in time for the IRS to transfer monies to your account’s custodian or trustee. To ensure that the monies are handled correctly, advise your custodian or trustee that you want them to go toward your current year’s contribution.

You can do this by filling out Form 8888, which tells the IRS where to mail your refund. If funds arrive late or you do not notify the custodian or trustee that you wish to apply them for the current year, they may be applied to the following year.

Fix Excess Contributions

The maximum IRA contribution for 2023 is $6,500 (or $7,500 if you are 50 or older). In 2024, it will be $7,000 (and $8,000 if you are 50 or older).

If you or your spouse participate in a qualified retirement plan at work, your modified adjusted gross income (MAGI) may reduce or eliminate the deduction available for conventional IRA contributions.

Your MAGI can also limit or prohibit contributions to Roth IRAs, independent of other plans. Any excess contributions—amounts greater than you are eligible to make—to your conventional and Roth IRAs are subject to a 6% penalty every year until you take corrective action.

The excess contribution penalty cannot exceed 6% of the total value of all your IRAs as of the end of the tax year.

If you contributed too much to any of your IRAs, don’t put off resolving the problem. If the excess contribution is for a traditional IRA, be sure you don’t deduct it. If you uncover the error before filing your tax return, withdraw the excess contribution (plus any gains) by the deadline to avoid the 6% penalty.

If you have already filed, eliminate any excess contributions and earnings within six months and file an updated return by the October extension deadline.

If you miss the deadline, eliminate the surplus (even if it was extended) and cut your contributions for the following year by that amount.

Withdrawals from an IRA are taxed as regular income and may be subject to a 10% early withdrawal penalty if under the age of 59½.

Take Required Minimum Distributions (RMDs)

Tax deferral does not endure forever. Make sure you understand when you need to start taking required minimum distributions (RMDs). The IRS levies a 25% penalty for missing RMDs, which means you’ll owe a quarter of the amount you should have withdrawn.

RMD regulations are complex, but here’s some information to help you get started:

• Roth IRAs have no required minimum distributions during the account owner’s lifetime. If you do not want the funds, you can leave the account alone and allow it to grow tax-free for your beneficiaries.
• For your own accounts, you must begin taking RMDs on April 1 of the year following you turn 73 (for persons born between 1951 and 1959) or 75 (for those born in 1960 or later). The RMD amount is calculated using IRS tables, which are available in IRS Publication 590-B. If you are married, your spouse is more than 10 years younger than you, and they are the account’s sole beneficiaries, use Table II (Joint Life and Last Survivor Expectancy); otherwise, use Table III (Uniform Lifetime).
• For inherited benefits from an IRA or a qualified retirement plan. The rules are based on your relationship with the account holder. If you are the surviving spouse, you can choose to transfer the benefits to your own account and handle them as if they were always yours. Thus, if you’re 60 and inherit an IRA from a spouse who died in 2023, a rollover allows you to postpone RMDs until you’re 73. If you are not the surviving spouse, you must normally distribute the entire balance by the end of the tenth calendar year following the owner’s death.

Other prominent exceptions to the 10-year limit for eligible designated beneficiaries include the owner’s minor child, a crippled or chronically ill beneficiary, and any other beneficiary who is no more than ten years younger than the original owner.

provided you failed to take your RMDs, you may be eligible for relief provided you can demonstrate reasonable cause for failure. You are not required to pay the penalty immediately, but you must file Form 5329 with your tax return and include an explanation for your failure (for example, you had a serious medical condition or received incorrect tax advice on how much to take).

Furthermore, you must show that you took the RMD as quickly as possible. The instructions for Form 5329 explain what to do.

Protect Yourself If You Took Distributions Before Age 59 ½

Even if you weren’t obligated to take distributions, you may have chosen to do so before reaching retirement age because you needed the funds. The distribution is normally fully taxable and will be reported to you on Form 1099-R by the Internal Revenue Service.

“About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” If you were under 59½ at the time, you will be punished 10%, unless you qualify for an exception.

Due to the 2020 pandemic-related economic crisis and its significant financial impact on many American households, the rules governing early retirement account distributions for the 2020 tax year have been amended.

The CARES Act permitted qualifying persons to borrow up to $100,000 or 100% of the vested balance in their retirement funds (whichever was less), as long as they were eligible for stimulus payouts. The dividend is taxable, however the taxes can be spread out over three years rather than being owed all at once in 2020.

If a taxpayer returns the cash to the plan within three years, it is deemed a rollover and not taxable. The CARES Act also permits a taxpayer to defer payments on any previous outstanding retirement account loans for up to a year.

In regular (non-COVID) years, if you qualify for an exception, you can escape the penalty but not the tax on the payout (the IRS provides the permissible justifications). If you want to rely on an exception, gather your proof right now.

For example, if you are disabled, be sure you have evidence from doctors or the Social Security Administration proving that you are completely and permanently unable to engage in any meaningful profitable activity. If you utilized the cash to pay for qualified higher education expenses for yourself, your spouse, or a dependent, keep the receipts.

What Is The Age for Required Minimum Distributions?

Previously, retirees had to begin taking required minimum distributions (RMDs) at age 72. SECURE 2.0, Section 107, raises the minimum distribution age to 73 on January 1, 2023, and to 75 in 2033.

Individuals who turn 72 after December 31, 2022 but before January 1, 2033 have their RMD age increased to 73. It will rise to 75 for those turning 74 after December 31, 2032.

What Is the Deadline for Contributing to an IRA?

You typically have until the tax filing deadline to contribute to your Roth or standard IRA. This generally occurs on April 15. The deadline for IRA donations in the tax year 2023 is Monday, April 15, 2024.

If you contribute between January 1 and April 15, make sure to identify the tax year to which the contribution pertains. Otherwise, your account’s custodian may apply the contribution to the current tax year.

How Can I Refund an Excess IRA Contribution?

If you contribute more than the maximum amount to your IRA, 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, withdraw the extra contribution and earnings (you must still report the earnings as income on your taxes).

If you have already filed your return, delete any excess contributions and profits and file an amended return by the October extension deadline.

The Bottom Line

The rules for retirement funds are complex and change frequently. For assistance, contact your plan administrator or IRA custodian, or, even better, your tax counselor.