Certain activity within an IRA can increase your taxes by 50%, learn what to avoid.
More financial tips for QuickBooks Users.
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Common Mistakes Made with IRA's


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Beneficiaries of your IRA
- Not naming a beneficiary.  Without one, the estate receives the IRA money and is then subject to estate tax and income tax leaving very little for the heirs. Don't name minor children beneficiaries of your IRA- they can't receive the money (you must name a custodian).  Leave money to adult children or adult grandchildren as they will be able to defer the tax free benefit of the earnings for a longer period of time.  You may name as many beneficiaries to your IRA as you want, just attach another piece of paper to the IRA application.  Ask the institution that handles your IRA if the IRA you have funded allows beneficiaries to receive payouts of the funds over the beneficiary's lifetime. If not, consider rolling over into another IRA at a different institution or mutual fund.  Your best bet- open one IRA per beneficiary, that way the beneficiary can choose the time frame he/she wants to receive the money without consideration of the other beneficiaries.  If you intend on leaving a charity a bequest and you have an IRA designate the IRA beneficiary as the charity and leave your other assets to your heirs.  Charities can receive IRA money income tax free and estate tax free while your heirs must pay both types of tax.  Be sure to have a separate IRA for the charity and not combine with other beneficiaries such as your children

If you list a TRUST as the primary beneficiary of an IRA, it might limit the options the beneficiary's may have and require a full distribution resulting in BIG TAXES. Make sure your attorney who drafts the trust is very experienced with IRA distribution rules to avoid problems.

Keep a copy of your IRA application with named beneficiaries in the same file box as your will.

You can begin withdrawing IRA funds at age 59 1/2. The very latest you begin to withdraw IRA funds is by April 1 of the year following  the year you turn age 70 1/2.  If you do hold off  withdrawing annual IRA payments until the year after you turn 70 1/2, then in that year you will need to withdraw a second annual payment by December 31.  Once you turn
70 1/2, you are required to withdraw a minimum payment (based on life expectancy tables) based on the balance in the IRA's. You never have to take money from a Roth IRA, and your heirs inherit it free of income tax.

It is your responsibility to withdraw the funds and to determine the amount of the distributions not the mutual fund or the banks.  They may have employees to help you make the calculations but it is not their responsibility to remind you or to automatically distribute to you the minimum payment. The ultimate responsibility is yours. Failure to follow the requirements result in hefty penalties (over 25%).  Get an accountant or attorney to help you follow these regulations, they are complicated and much cheaper than paying the penalties.  Also, there are some IRAs and retirement plans may have a grandfathered estate planning advantage.  So before moving assets from 401Ks and Keoghs into IRAs check with your advisor.

Don't purchase a taxed deferred investment such as an annuity or municipal bonds in your IRA . They pay a lower rate of return because of the favored tax status which is not needed in the IRA.


Mistakes to avoid when you Inherit an IRA

The following mistakes apply to "Non-Roth" IRAs. If you have inherited a Roth IRA you can take distributions out of the Roth Tax Free unless the Roth was established less than 5 Years before death.

  1. Determine if the deceased took the required minimum distribution in his/her year of death. A required minimum distribution is required if the deceased was over age 70 1/2.  If the deceased did not take out the required minimum distribution, the beneficiary must take out the required minimum distribution by 12/31 of the year of death or the beneficiary is liable for a 50% penalty (of the required distribution)

  2. DON'T take all the money out of the IRA immediately! -  See your financial advisor first!
       Spouses can treat the IRA as if it were their own, so follow the withdrawal rules above
       Everyone else- Cashing out the plan means paying income taxes!
           You have 2 options -

    A Withdraw 100% within 5 years:   Yes, the taxman must still be paid, but pacing the income 5 years. For large
    IRA balances you could end up with an expensive tax bill.
    B Take distributions over your life expectancy
    Leaves the funds in the IRA to continue to grow tax free. You must take a required minimum distribution(RMD) every year and you must take the first RMD  by 12/31 of the calendar year following the year of death.


  3. For estates that are over $5,000,000 in 2012 ( which may return to $1,000,000 in 2013), there may be an estate tax assessed on the IRA.  When you withdraw from the deceased IRA it is taxable income. If estate taxes were paid too,
    you get an income tax deduction for the estate taxes that were paid on the IRA.  Google the term "income in respect of a decedent










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