5 COMMON IRA MISTAKES AND PROPER CORRECTIVE ACTION…IF AVAILABLE!

February 28, 2024

Andy Ives, CFP®, AIF®

IRA Analyst

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Year after year, many of the same IRA errors happen again and again. Based on the volume of times these mistakes occur, it seems appropriate to create a short list of repeat offenders…and offer some advice on how to properly move forward. In no particular order, here is a handful of common IRA mistakes, along with the proper corrective measures.

Rolled over a required minimum distribution (RMD).Oops. RMDs cannot be rolled over. Technically, an RMD is not an ERD – an “eligible rollover distribution.” If an RMD is rolled over, it is an excess contribution, and the excess contribution rules must be followed. You have until October 15 of the year after the year of the excess contribution to make the correction with no penalty. Prior to the deadline, the rolled-over RMD must be withdrawn along with the attributable earnings. No special tax forms are required, and there is no penalty. Any earnings are taxable. After the October 15 deadline, only the excess must be withdrawn – the earnings can remain. (I know – weird.) File IRS Form 5329 and pay the 6% annual excess contribution penalty.

Contributed to a Roth IRA for a child with no earned income.Your child must have earned income to be eligible for a traditional or Roth IRA contribution. If a contribution is made to an IRA for anyone with no earned income, it is an excess contribution, and the same excess contribution correction protocols outlined above must be followed.

Took two IRA distributions with the intent to roll them both over. Uh-oh. The one-rollover-per-year rule does not allow two separate IRA distributions to be rolled over within a 12-month period. Combining them into a single deposit won’t work. Is there a fix? If you are still within the 60-day period, one of the distributions can be rolled over. Usually, a person will choose to put back the larger of the two withdrawals. Since the other distribution cannot be rolled over, and since you will be stuck with the taxes anyway…might as well put it into a Roth IRA (assuming you are still within the 60 days). This qualifies as a valid Roth conversion, and conversions do not count against the one-rollover-per-year rule.

Non-spouse beneficiary tried to do a 60-day rollover with inherited IRA dollars.Oh, no. There is no fix for this scenario. This is what we refer to as a “fatal error.” Non-spouse IRA beneficiaries cannot do 60-day rollovers with inherited IRA dollars. If you take a distribution from an inherited IRA as a non-spouse beneficiary, taxes will be due. Those dollars cannot be rolled over, converted, or redeposited back into the same inherited IRA.

Taxes withheld on Roth conversion when under 59 ½. This is a sneaky mistake.Taxes withheld on a Roth conversion do not get converted. If you are under 59 ½, this is a problem. The taxes withheld are, in fact, a premature withdrawal, and a 10% penalty will be due on the money sent to the IRS! However, if caught in time, there is a fix. If still within 60 days, the amount withheld can be replaced with money from another account. Use other dollars to “make up” the withholding. Put these “make-up” dollars into the Roth, and the conversion will be made whole. Now, the taxes originally withheld will be a credit at the IRS.

Potholes and speedbumps abound with IRAs. Drive carefully. But know that if you do bump a curb, there is a good chance proper corrective action is available.

5 Common IRA Mistakes and Proper Corrective Action…If Available!

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