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Your Retirement Tax Prep List

Picture of Randall E. White

Randall E. White


Review These Reminders Before December 31 Each Year

Utilizing qualified retirement plans and individual retirement accounts (IRAs) for your retirement planning is a smart move – after all, earnings on these tax-advantaged accounts grow tax-deferred or even tax-free. In order to make sure you get the most out of them, as well as stay up to date with all account requirements, review the below reminders each year.

Take Note of Contribution Deadlines

Missing a contribution deadline can mean the difference between hitting your retirement goals on the head or falling short of accomplishing them. As an individual, remember that you have until the tax filing deadline each year to contribute to your IRA or Roth IRA. It’s important to note that, even if you get a filing extension, you will not get an extension on the contribution deadline.

If you own a business, however, you may contribute to a qualified retirement plan up to the extended tax return due date – if the plan was signed and in place by December 31 of the previous calendar year, that is. If you missed that deadline, you still have the option to set up an SEP IRA by the extended due date of your return.

Utilize Your Tax Refunds for Contributions When Possible

If you get a tax refund in any given year, consider using it as a contribution to your IRA or Roth IRA. You can make this easy by using Form 8888 to tell the IRS where to direct your refund. If you’re within the window to contribute for the prior tax year, make sure you notify your custodian or trustee which year you’d like the contribution applied for.

Trouble-Shoot Any Excess Contributions

It’s possible that your modified adjusted gross income will be high enough to limit or bar contributions to deductible IRAs if you – or your spouse – have a 401(k) or similar retirement plan through work. You might also surpass the income threshold to contribute to a Roth IRA at all. In these cases, if you have inadvertently made excess contributions above what you’re eligible to make, you’ll be subject to a six percent penalty each year until you correct the problem.

This can happen, for example, if you made your annual contribution early in the tax year and then discovered that your income was too high. Once you recognize the problem, try to correct it right away. For example, if you contributed to a deductible IRA, don’t take the deduction and be sure to withdraw the contribution, along with any earnings, before the filing deadline for the tax year in question.

SEE ALSO: Eight Steps to Master Saving for Retirement with Your Spouse

Be Sure to Take Your Required Minimum Distributions

Tax-deferred accounts are a fantastic tool, but tax deferral doesn’t last forever. Eventually, you’ll need to begin taking required minimum distributions (RMDs). If you don’t, you might be subject to as much as a 50 percent penalty. RMD rules are quite complex, so this is an area that requires constant vigilance. Here’s an RMD cheat sheet to get you started:

  • As of 2020, the age at which you must begin taking RMDs is 72 (up from 70 ½).
  • For your own accounts, if you were 72 or older in 2020, you will be required to take an annual distribution based on IRS tables. You should use Table II, Joint Life, and Last Survivor Expectancy, if you are married, your spouse is more than ten years younger than you and he or she is the only beneficiary of your account. Otherwise, you should use Table III, Uniform Lifetime.
  • For an inherited IRA or qualified retirement plan, your requirements will depend on your relationship with the account holder. If you are a surviving spouse, you’re permitted to roll over the benefits to your own account and treat them as yours. This is usually a good idea especially if you’re under age 72 because it means you can postpone RMDs until that time. If you’re not a surviving spouse, you typically have a timetable of ten years after the owner’s death to take distributions of the entire interest, though you can choose to start taking RMDs by December 31 of the year following the year of the account owner’s death.

If you happen to fail to take an RMD, it’s possible to qualify for relief if you can show reasonable cause for your failure. While you don’t have to pay the penalty upfront, you’ll have to file Form 5329 with your tax return, along with an explanation for why you failed to take a required distribution. Your reason might be something like a severe illness or medical condition, or that you received poor tax advice. Further, you’ll have to prove that you took the RMD as soon as you were able to after realizing the mistake.

SEE ALSO: Early Retirement: Pros, Cons, and Alternatives

Protect Yourself if You Took Distributions Earlier Than Age 59 ½

Sometimes, even if you’re not yet required to take distributions, you might do so simply because you need the money in any given year. Generally speaking, these distributions will be fully taxable unless they come from a Roth IRAs or nondeductible IRA. If you were under age 59 ½ at the time of a distribution, you will be penalized 10 percent unless you qualify for one of the IRS’ recognized exceptions. Note that, even if you qualify for an exception and avoid the penalty, you’ll still be subject to the tax on the distribution.

Avoid Errors by Working with a Financial Advisor

The rules governing retirement accounts, taxes, and distributions are complex, to say the least. To avoid making costly missteps, consider working with a financial advisor. At TriCapital, we’ve spent the last twenty years helping our clients plan for a confident financial future, and we look forward to sharing our professional knowledge and guidance with you, too. Contact us today to begin a conversation about your retirement planning goals.

Securities offered through Triad Advisors, LLC, member FINRA/SPIC. Advisory services offered through TriCapital Wealth Management, Inc. TriCapital Wealth Management, Inc. is not affiliated with Triad Advisors, LLC.

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