Thursday, September 09, 2010

The New Threat To Your IRA: An IRS Crackdown

IRS rules and regulations surrounding IRAs frequently confuse taxpayers, but until now minor slip-ups were often overlooked or forgiven with a small fine. However, the IRS has been cracking down on IRA account holders lately. According to this article, you should be careful to avoid excessive IRS penalties.

After years of haphazard enforcement, the Internal Revenue Service is starting to systematically search out violations of the convoluted rules governing individual retirement accounts. There's a lot at stake. Americans hold $4.3 trillion in IRAs, and the cost of even innocent mistakes can be steep; if you miss taking a required payout from your IRA, Uncle Sam will demand half of the amount you forgot to take as a penalty.

The IRS was prodded to act by the Treasury Inspector General for Tax Administration. In a report earlier this year it concluded that IRA violations have been growing and estimated that more than half a million taxpayers either missed required payouts or contributed more than allowed to IRAs during 2006 and 2007.

"No one was auditing this stuff. Now the IRS is cracking down,'' says Seymour Goldberg, a Woodbury, N.Y. lawyer who serves on a committee of tax pros who meet with the IRS on pension issues. Here are some IRS targets and ways to keep your retirement stash out of its sights.

Missed Required Payouts

You put pretax money into a traditional IRA, where it grows tax-deferred. But Uncle Sam wants his cut eventually. So the law requires IRA owners to begin taking "required minimum distributions" from traditional IRAs after they turn 701/2. Roths work in reverse. You contribute already taxed cash to a Roth, and distributions are tax free. Owners of Roths, no matter how old, don't have to take RMDs. Nonspousal heirs of both traditional and Roth IRAs must generally take RMDs regardless of their age. To complicate matters, Congress suspended all RMDs for 2009 to give retirement accounts depleted by the 2008 market crash time to recover. But RMDs are back for 2010. That change will likely trip up additional taxpayers in 2010.

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