Penalty taxes on retirement plans
Tax Boundaries and Retirement
Although it’s important to contribute to your retirement plans on a regular basis, there are a few boundaries to keep in mind when deciding on how to distribute your income and when to withdraw cash from your assets.
Limits on Distributing Income
First, individual retirement accounts (IRAs) have a specific limit on how much you can contribute in a given year (for 2011-2012, this is $5,000; if you’re over 50, however, you can increase that amount by $1,000).
Anything beyond the limit won’t count as a deduction, so in general it’s better to give up to that amount and not a penny more (you’ll also avoid any excise taxes on money contributed over the limit).
Restrictions on Making Withdrawals
Likewise, since the money in these accounts is intended for your retirement years, tapping the funds early—i.e. before you’re 59½--may result in an additional 10% tax being levied on your withdrawal.
In most cases, though, you’ll want to ensure that you’re receiving distributions from your IRA by April 1st of the year after you turn 70½ (so celebrating your 70th birthday on January 1st of 2012 would mean that you’d have to receive cash amounts from your IRA by April 1st 2014).
If you’ve waited that long, however, you’ll most likely find yourself with two distributions in your starting year, which may result in additional taxes as your income artificially inflates for that year.
Maintaining Minimum Value
Once you start receiving distributions from your IRA, you’ll need to make sure of the following: First, they should arrive by December 31st of each year.
Second, they should list an amount equal to or above the minimum required value (to determine this value, you’ll need to consult either the current tax code or your preferred financial expert).
If, for some reason, your distribution’s value is below the minimum requirement, you’ll be required to pay a 50% tax on the difference (i.e. a $5,000 check on a $10,000 distribution would result in a $2,500 penalty).
Remember, being mindful of the boundaries will not only save you money, it will help preserve your quality of life.
Remember, being mindful of the boundaries will not only save you money, it will help preserve your quality of life.This material is for informational purposes only. Neither New York Life nor its agents provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.