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Estate and Elder Law

Keep Track of IRS Rules on IRAs and Other Retirement Accounts


Owners of individual retirement accounts might face increased scrutiny by the IRS in the near future, posing the danger of hefty penalties for account mistakes that have previously gone unnoticed. As this recent online Wall Street Journal article notes, the IRS recently has been cracking down on secret foreign accounts and high earners. Now its attention is likely to turn to IRA account holders as the agency implements more aggressive enforcement strategies in reviewing IRA accounts. The agency will report its new policy regarding taxpayer errors to the Treasury Department by October 15, but until then, account owners should take extra care to ensure that any past withdrawal and contribution errors are corrected proactively and to prevent future errors, as the penalties for such errors can amount to 50% of the amount IRA holders failed to withdraw.

Here are some rules to keep in mind when reviewing your account with your lawyer, CPA or financial planner.

  • IRA owners are required to start making withdrawals from traditional IRAs by April 1 of the year after they turn 70½. Such withdrawals are calculated by dividing the total IRA balance as of December 31 of the year prior to turning 70½ by life expectancy, which can be found in IRS Publication 590.
  • IRA owners who have a spouse more than a decade younger who is their sole heir must consult a separate life-expectancy table in the same publication.
  • Workers whose money is in a 401(k) who don't own more than 5% of the company do not have to make withdrawals from that account when the turn 70 ½, provided that they still work for the company sponsoring the account. However, withdrawals do have to be made if you roll your 401(k) over to an IRA, regardless whether you continue working for that employer after you turn 70½.
  • Traditional IRA owners cannot contribute more than $5,000 a year, or $6,000 if age 50 or older. IRA owners also cannot contribute more than their "earned income," which includes wages, commissions, and alimony, but does not include rental-property income, pension, or deferred compensation. 
  • Mistakes regarding excess contribution can be corrected before October 15 of the following year by withdrawing the excess amount plus interest.
  • Inherited IRA accounts allow for tax-deferred growth and annual minimum required distributions. However, the person inheriting the account must make the required withdrawal and report it as ordinary income on his or her own tax return if the decedent account owner was over 70½ and failed to make the withdrawal for that year prior to death. Designated beneficiaries who inherit accounts from anyone other than a spouse must take withdrawals across their own life expectancies starting the year after the death of the original account holder. Beneficiaries who inherit an IRA account from a spouse can either roll the account into their own IRA or set up an inherited IRA and postpone taking required distributions until the decedent would have turned 70½.

Gregory Herman-Giddens, JD, LLM, TEP, CFP, Attorney at Law (NC, FL, TN), Board Certified Specialist in Estate Planning and Probate Law (NC). North Carolina Registered Guardian, Solicitor, England and Wales. Follow his blog, North Carolina Estate Planning Blog..


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