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Tax Resource Center

IRA Contribution, Distribution and IRA Penalties Tax FAQs

What should I do if my IRA contribution exceeded the maximum amount allowed?

You can avoid the 6% excise tax on excess contributions by withdrawing the excess and earnings attributable to it by the due date of your tax return. If you file your tax return on time, you’ll have an automatic six-month extension to make the withdrawal. If removed in a timely manner, the excess contribution is not taxable. The earnings, however, are taxable in the year the excess contribution was made. If you’re under age 59½, the earnings are also subject to a 10% premature distribution penalty unless an exception applies.

 

What happens if I don't remove the excess contribution and earnings in a timely manner?

If the excess contribution and earnings are not removed in a timely manner, the 6% excise tax will apply for the year the excess occurred and all subsequent years until the excess is either withdrawn or utilized as a contribution.

 

If I am age 50 or older, can I make a catch-up contribution to my IRA?

If you were age 50 or older by the end of the year, you may contribute an additional $1,000 to your traditional or Roth IRA for that year.

 

Are there any exceptions to the 10% IRS early distribution penalty?

The IRS allows several exceptions to the 10% IRS early distribution penalty if you receive a distribution from your IRA before age 59½.

  • Death
  • Disability
  • Series of substantially equal periodic payments based on life expectancy
  • Qualified higher-education expenses
  • Qualifying first-time home buyer expenses
  • Deductible medical expenses
  • Health insurance premiums for unemployed individuals
  • Distributions as a result of IRS levy

 

What do I do to avoid the 10% IRS early distribution penalty if one of these exceptions applies to my distribution?

Complete Part I of IRS Form 5329 and include with your tax return to avoid the 10% IRS early distribution penalty.

 

What is a required minimum distribution (RMD) and will it be taxed?

In general, the IRS requires you to start taking a minimum amount from your qualified retirement accounts starting with the year you turn age 70½ to ensure the money you've saved is used for what it was intended – to fund your retirement.

Your RMDs are typically taxed as ordinary income in the years you receive them. Unless you specify otherwise on your election form, 10% of your distribution will be automatically withheld as prepayment of federal income tax. (State withholding may also apply, depending on the product(s) you own and the state where you live.) The penalty for failure to meet your RMD is 50% of teh amount not taken for that year. Roth IRAs do not have an RMD requirement during the owners lifetime.

 

How is my traditional IRA distribution taxed?

Generally, traditional IRA distributions are taxable as ordinary income in the year withdrawn. If you made nondeductible contributions, you must complete IRS Form 8606 to determine the nontaxable portion of each distribution.

If you receive a distribution before age 59½, a 10% IRS early distribution penalty could apply to the distribution unless you meet one of the exceptions under Internal Revenue Code (IRC) Section 72(t). See the IRS Form 1099-R for more information.

 

As a beneficiary of an IRA, how are my distributions taxed?

Traditional IRA distributions are taxable to the beneficiary as ordinary income for the year of the distribution. This distribution qualifies as an exemption to the 10% IRS early distribution penalty, regardless of the age of the beneficiary or deceased owner. See IRS Publication 590-B—Individual Retirement Arrangements (IRAs)—for more information.

 

Can losses in my IRA reduce my tax liability?

You may be able to recognize the loss on your income tax return. See IRS Publication 590 for more information.


At Thrivent Mutual Funds, we recommend you consult your tax advisor to make sure you’re getting the most out of your investments. Thrivent Mutual Funds and their representatives cannot provide legal or tax advice.