Tax Benefits for IRAs

In an article at, they talk about the tax benefits people miss out on each year.  You may pay taxes on investments that are tax-free or excise taxes on distributions that should be waived.  This happens because many people don’t know the laws or make mistakes on his or her tax returns.

Basis, also referred to as after-tax balances, accrue in retirement accounts from nondeductible contributions and rollovers of after-tax amounts to IRAs. Distributions of basis amounts are supposed to be tax free. However, if you fail to track these amounts, you could end up paying the IRS taxes on them, resulting in double taxation. Furthermore, if you fail to file IRS Form 8606 (Nondeductible IRAs) for the year, you may owe the IRS a penalty of $50, unless you can show reasonable cause for the failure,” says contributor Denise Appleby.

Things to Note
I. Once you make a nondeductible contribution or roll over after-tax amounts to any of your Traditional, SEP or SIMPLE IRA, any subsequent distributions from any of your Traditional, SEP or SIMPLE IRAs will include a prorated amount of pretax and post-tax assets, as these IRAs are aggregated for the purposes of determining the taxable amount of any distributions.

II. If you have multiple Traditional, SEP and/or SIMPLE IRAs with different primary beneficiaries, you may want to maintain a separate Form 8606 for each IRA. This would allow each beneficiary to determine the basis of his or her inherited IRA and file any required Form 8606 accordingly.

Also, if you inherited an IRA from someone who has died, you’re responsible for the taxes when funds are distributed,  However, these amounts may also be included in the decadent’s estate.  If the estate files IRS Form 706, which is United States Estate [and Generation-Skipping Transfer] Tax Return, you may be eligible for a federal tax deduction.  This is known as an IRD or Income in Respect of Decedent.

Thirdly, if you take distribution before you are age 59 1/2, you’re usually assessed a 10% early withdrawal penalty.  But, there are exceptions to this tax, such as first time home buyer, continued health insurance is you lose your job or if you become disabled.  Talk to en expert to see if you qualify for the waiver of this excise tax.

Finally, one of the biggest penalties having to do with an IRA is not fulfilling your required minimum distributions.  After you reach age 70 1/2, you are required to withdraw a certain amount of your traditional IRA each year (as per an IRS table).  Failure to do so results in a whopping 50% penalty.  “If the failure to distribute your RMD by the deadline is due to a reasonable error, you may request a waiver of the penalty by distributing the amount and writing an explanation to the IRS,” says Ms. Appleby.

Refer to the article cited above for some examples and more information on these needless mistakes.  Be sure to contact the IRA Financial Group to talk to an expert to see if you’re missing out on any tax breaks.

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