Retirement Plan Tax Prep Checklist

Qualified retirement plans and IRAs give you the opportunity to save for retirement on a tax-advantaged basis. Earnings on contributions grow tax deferred (or tax free for Roth IRAs). When it comes to tax time, be sure you are up-to-date with all requirements.

You have until the tax filing deadline for your 2018 return to contribute to an IRA or Roth IRA (April 15, 2019; the dates are back to normal this year). You don’t get more time to make IRA contributions even if you obtain a filing extension for your tax return. 

However, if you own a business, you can contribute to a qualified retirement plan up to the extended due date of your return (e.g., October 15, 2019, for a 2018 contribution), as long as the plan was in place on December 31, 2018 (you signed the paperwork by that date). If you didn’t, you can still set up and fund a SEP-IRA by the extended due date of your return.

If you’re owed a tax refund, you can apply it toward a contribution to an IRA, Roth IRA​. This can be for 2018 if you submit your tax return in time for the IRS to send the funds to your account’s custodian/trustee; be sure to notify your custodian/trustee that you want the funds applied for 2018. Use Form 8888 to tell the IRS where to send your refund. If funds arrive late or you don’t tell the custodian/trustee that you want them used for 2018, then they’ll be applied for 2019.

Your modified adjusted gross income may limit or bar contributions to deductible IRAs if you participate in a qualified retirement plan (e.g., you have a 401(k) at work) and to Roth IRAs, regardless of any other plans. Any excess contributions – amounts higher than you are eligible to make – are subject to a 6% penalty each year until you take corrective action.

If you already made a contribution for 2018 and discover that your income was too high, don’t delay fixing the problem. For example, if you contributed to a deductible IRA, don’t take the deduction. And withdraw the contribution, plus any earnings, no later than April 15, 2019.

If you contributed too much to a Roth IRA because of your income, be sure to take corrective action no later than December 31, 2019. In this way, you owe the penalty only for 2018, but avoid it for future years. For example, you can withdraw the excess contribution plus earnings or instruct your IRA custodian to treat the excess 2018 contribution and earnings as your 2019 contribution. Note that the contribution limit for 2019 is $6,000, while the 2018 limit is $5,500. You'll have to check whether earnings on the account could still put you over the limit and continue to incur a penalty.

Note that you can no longer "recharacterize" your Roth IRA contribution back to a traditional IRA, as you could before the Tax Cuts and Jobs Act of 2017.

Tax deferral doesn’t last forever. Make sure to understand when – and to what extent – you must take required minimum distributions (RMDs). If you fail to take RMDs, you can be subject to a 50% penalty for insufficient distributions. RMD rules are very complex. Here is some information to get you started.

• For your own accounts. If you were 70½ or older in 2018, you must have taken an annual distribution based on IRS tables, which can be found in IRS Publication 590-B. Use Table II (Joint Life and Last Survivor Expectancy) if you are married, your spouse is more than 10 years younger than you and he/she is the only beneficiary of the account; otherwise use Table III (Uniform Lifetime).
• For inherited benefits from a qualified retirement plan or IRA. What you have to do depends on your relationship with the account holder. If you are a surviving spouse, you can opt to roll over the benefits to your own account and treat them as if they were always yours. Thus, if you’re 60 and inherit an IRA from a spouse who died in 2018, a rollover means you can postpone RMDs until you reach age 70½. If you’re not a surviving spouse, you generally must take a distribution of the entire interest by the end of the fifth calendar year after the owner’s death. Alternatively, you can take RMDs starting with a distribution by December 31 of the year following the year of the owner’s death; use Table I (Single Life Expectancy) for this purpose.

If you failed to take RMDs, you may qualify for relief by showing reasonable cause for your failure. You don’t have to pay the penalty up front but must file Form 5329 with your tax return and attach an explanation for your failure (e.g., you had a severe medical condition; you received bad tax advice about how much to take). What’s more, you must show that you took the RMD as soon as you could. Instructions to Form 5329 explain what to do.

Even if you weren’t required to take distributions, you may have opted to do so in 2018 because you needed the money. The distribution generally is fully taxable (different rules apply to Roth IRAs and nondeductible IRAs). The distribution is reported to you on Form 1099-R. In addition, if you were under age 59½ at the time, you’ll be penalized 10% unless you qualify for a penalty exception.

You may avoid the penalty – but not the tax on the distribution – if you qualify for a penalty exception. The exceptions are listed by the IRS. If you want to rely on an exception, get your proof together now. For example, if you are disabled, be sure to have documentation from doctors or the Social Security Administration showing you are totally and permanently unable to engage in any substantial gainful activity. If you used the funds to pay qualified higher education costs for yourself, or your spouse or dependent, have receipts for these costs.

The rules for retirement accounts are complicated. For help, talk to your plan administrator or IRA custodian or, even better, your own tax advisor.