Tax Traps You Should Be Aware Of
Every year, it seems that there are new and complicated changes to the U.S. tax code, making the entire task of completing your taxes more complex. While doing your taxes on time is crucial, many individuals end up rushing the process to meet the tax deadline. However, this does not mean they were done accurately. Overlooking something vital may be even more common when it comes to taxes related to your investments, such as an IRA.
To help prevent this from happening, here are a handful of common IRA tax traps in particular that you should be sure to avoid.
Eligibility Tax Trap
The first tax trap is that people may not realize that they are eligible to contribute to an IRA. Traditional IRAs are available to anyone who is making reportable income and are under 70 ½ years of age. There are restrictions on whether or not those traditional IRA contributions are deductible, but everyone previously described is eligible to contribute to them. By not contributing to an IRA, you’re likely falling into the trap of not benefitting from the tax benefits.
60-Day IRA Rollover Tax Trap
Starting in 2015, those with an IRA account were eligible for a single tax-free 60-day rollover between IRA accounts in any given 12-month period. This act can be beneficial to optimize your investments. But, a second such rollover in 365 days, even if in different calendar years, will trigger notable tax liabilities and early withdrawal penalty taxes.
IRA Beneficiary Tax Trap
If you want your IRA to help your beneficiaries, you want to be sure to maximize the amount that they’ll actually get paid out. To do this, you want the benefits of tax-deferred earnings on your IRA to be passed on, and this can be accomplished with a Stretch IRA. By filling out proper Restricted Beneficiary Forms, you can be sure to save those beneficiaries up to thousands of dollars in unforeseen tax liabilities
No Backup Beneficiary Tax Trap
If you named one beneficiary to your IRA account and that person passes before you do, it’s critical to appoint a new beneficiary. You can also have a contingent beneficiary listed on file, which would become the primary should the initial primary pass. They may run down a list of succession that does not follow what you would have intended. If the beneficiary is an individual, an organization, or charity, they all have different tax implications. Be sure to consider this and specify where you’d like to see your IRA funds go.
If you’d like to avoid falling into any of these tax traps – contact the good folks at Tobin & Collins! We’re here to make your lives easier.