Contributions and withdrawals from retirement plans, excessive contributions, and loans from retirement plans, all can easily be miscalculated. An increasing number of tax filers are becoming a victim of the 6% additional tax on excessive contributions towards the retirement plans.
Joint contributions and joint tax filing can also become cumbersome for layman’s calculation skills. Certain retirement plans qualify for loans, not all of them. Similarly, the contribution limit changes above the age of 50. The minimum distribution (withdrawals) must also begin at age 70 ½ to avoid any penalties.
Contribution Limits to Follow
The maximum contribution limits for traditional IRA’s and Roth Plans are simple. Yet many people forget and make excessive contributions. These excessive contributions may get them audit notices or additional taxes.
$6,000 for single and $7,000 above age 50
$12,000 and $14,000 for joint contribution plans respectively
$5,500 and $6,000 for contributions for years before 2019
If you make excessive contributions to the IRA’s or Roth plans, it will be taxed at 6% by the IRS. Also, make sure to double-check your rollovers. You are allowed only ONE rollover in your traditional retirement plan within one year.
You can avoid the additional 6% tax liability if you withdraw the excess contribution before the deadline of your income tax returns for each year. Remember to count in the interest earned on excessive contributions too.
Can you take a Loan out of IRA’s?
The traditional IRA’s and Roth Plans do not qualify as lending funds. Never take a loan amount out of the IRA’s and Roth plans. If you do, all the contributed funds and accumulated balance will be treated as your TAXABLE income.
If at all, some qualified plan can provide you the reprieve. The maximum limit on loans from qualified retirement plans will be:
$10,000 or 50% or the plan funds whichever is greater, or
The 50% of plan funds are capped at a maximum of $50,000
Contributions for 401(k) and Other Employer Plans
The employer contribution plans provide extended limits to both employer and employees. You can open more than one 401(k) or SERP’s if you have different employers. The contribution limits for individuals with an employer shared plans are $19,500. At age 50 or above, you can contribute an additional $6,500. The total contribution for an employee in a 401(k) must not exceed $58,000.
Apart from contribution limits, deferred contributions, and excessive contributions, the participants also heavily incur tax penalties with early withdrawals. These early distributions of retirement plans incur additional tax penalties and may also result in an IRS audit notice for you.
Early Distributions for Retirement Plans
Your early distributions with an IRA will be taxed at 25% if taken within the first two years of the plan life. If you take an early distribution before the age of 59 ½ from an IRA, it will cost you an additional 10% tax penalty.
By the age of 70 ½, you are required to withdraw the required minimum distribution (RMD) from your retirement plan. The deadline is set on April 31st of the year you turn 70 ½ and December 31st for subsequent years. If you do not withdraw, you’ll incur a penalty of 5% of the RMD amount each year. This is a common mistake that IRS founds from the tax filers. You wouldn’t want to be writing explanatory letters to the IRS for not withdrawing the RMDs.
The most commonly found mistakes with retirement plans remain as late contributions, excessive contributions (twice in a year), and taking out loans from non-qualified plans. Most seniors also defer their Required Minimum Distribution in the first year they turn 70 ½.
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