As tax season nears its end, it’s time to make sure everything is in order before April 15th. The following are a few pitfalls to avoid with your Individual Retirement Account.
1. Exceeding the IRA Contribution Limit
For 2012 the maximum contribution to your IRA is $6,000 (depending on your age). If you exceed this limit, “a 6% excise tax applies”. If it seems you have contributed more than the $6,000 limit for 2012, you may apply these contributions to 2013 (as long as that amount does not exceed the contribution limit for 2013). This is a common way to avoid the 6% tax penalty and get ahead on your IRA for next year. For those who like to contribute the maximum amount to their retirement, the contribution limit for 2013 for IRAs has been increased to $6,500 for individuals above age 50½, and $5,500 for individuals below 50½.
2. Borrowing Money and Other Prohibited Transactions
For those under the age of 59½, it can be quite costly to withdraw assets from your retirement account. You will typically face two unpleasant tax burdens if you do not meet any of the IRS exceptions. For example, John is 45 years old and withdraws $5,000 from his IRA. First, he will face taxes on that amount because his gross income has just increased by $5,000. Then he will have to pay the IRS $500 more due to an additional 10% tax penalty for making the early withdrawal. Other prohibited transactions include selling property to your IRA, buying property for personal use (such as a vacation home), and/or anyone receiving unreasonable compensation for managing your IRA. If you are concerned you could be making a prohibited transaction, be sure to talk with the IRS to find out more information.
3. Not Taking Your Required Minimum Distribution
You cannot keep assets in your IRA indefinitely. For persons who have reached age 70½, you must take your Required Minimum Distribution (RMD) each year. Failure to do so may result in a large tax penalty. Typically this penalty is 50% of the RMD not taken in that year. Additional distributions taken beyond your RMD will not count toward future years.
4. Avoid Prohibited Investments
The IRS will view any amount invested in certain collectibles as a distribution. This may make you again subject to a 10% additional tax. Be careful of investing in collectibles such as artworks, rugs, antiques, stamps, and non-IRA permissible coins. However, specific types of bullion and IRA permissible coins minted by the Treasury Department are allowed.
Don’t let your IRA be subject to tax penalties due to prohibited investments. American Bullion specializes in adding IRA permissible gold and silver to retirement accounts. If you have a question or would like to know more about your investment options, please call 1-800-326-9598 to speak with a precious metals specialist.
Disclaimer: American Bullion and its agents are not registered or licensed by any government agencies and are not financial or tax advisors. Investors should do their due diligence before committing any money to purchase gold and other precious metals. If you have additional questions, please contact American Bullion.