confusing

It is extremely easy to inadvertently make excess contributions, miss required minimum distributions, and engage in prohibited transactions

The IRS Cracks Down on IRA Mistakes »

Eleanor Laise, Kiplinger (Nov. 30, 2012)

“It’s easy to make a mistake. Consider excess IRA contributions. In 2012, people age 50 or older can contribute $6,000 to a traditional or Roth IRA, or their taxable compensation for the year -- whichever is smaller. A person who makes the maximum contribution at the start of each year may lose his job and fail to meet the taxable compensation hurdle. Or a retiree whose only income comes from pensions and dividends may not realize that “compensation” generally refers to earned income such as wages.”

“Another common mistake is failing to take RMDs on time.”

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IRA Rules Get Trickier »

Kelly Greene, Wall Street Journal (June 22, 2012)

“Arthur Elkin, a 60-year-old retired federal government worker in Delaware, didn’t realize he and his wife had made excess contributions to their Roth IRAs for seven years until he started working with a new accountant.”

“Jean Hockenbrocht, a 76-year-old chocolate-factory worker in Lititz, Pa., says she missed four years of IRA withdrawals because her investment advisor confused . . . [the] rules. He had rolled her 401(k) to an IRA and mistakenly told her she should skip the distributions because she was still working.”

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Additional IRS Actions Could Help Taxpayers Facing Challenges in Complying with Key Tax Rules »

Government Accountability Office, GAO-08-654 (Aug. 2008)

“IRS’s National Research Program showed that nearly 15 percent of taxpayers who took traditional IRA contribution deductions as well as 15 percent of those who took taxable distributions misreported on them.”

“Taxpayers face challenges in figuring how much they can contribute, navigating the various distribution rules, and rolling over their IRAs between custodians.”

“Complexity of IRA rules was cited by IRS officials, IRA custodians, and financial planners we interviewed as the overarching contributor to challenges facing taxpayers in complying with IRA rules.”

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Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets »

Government Accountability Office, GAO-17-102 (Dec. 2016)

“IRA investments in rental real estate, with its many transactions, for example, can leave IRA owners susceptible to a number of prohibited transactions, any one of which would result in the loss of the IRA’s tax-favored status.”

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disproportionally harsh penalties

IRA owners who accidentally make certain mistakes are subject to disproportionally harsh penalties

Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets

Government Accountability Office, GAO-17-102 (Dec. 2016)

“Unlike a 401(k) plan sponsor, who has an opportunity to voluntarily correct some prohibited transactions after they occur, IRA owners face adverse tax consequences when engaging in a prohibited transaction.”

“Specifically, if the IRA owner engages in a prohibited transaction, the IRA loses its tax-favored status as an IRA, and the account is treated as distributing all of its assets to the IRA owner at FMV [Fair Market Value] on the first day of the year in which the transaction occurred.”

“The IRA owner may also be subject to a 10 percent additional tax on early distributions.”

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congressional action required

The IRS education, and enforcement systems need to be improved

Actions Can Be Taken to Further Improve the Strategy for Addressing Excess Contributions to Individual Retirement Arrangements »

TIGTA, Ref. No. 2015-10-020 (Mar. 2015)

“The IRS did not develop education materials for IRA custodians.”

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A Service-wide Strategy Is Needed to Address Growing Noncompliance With Individual Retirement Account Contribution and Distribution Requirements. »

TIGTA, Ref. No. 2010-40-043 (Mar. 2010)

“We again found that IRS procedures are inadequate to identify individuals who make IRA contributions in excess of what the law allows or individuals who are not taking required minimum distributions.”

“Our review . . . showed that noncompliance with the excess contribution limit has grown significantly.”

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education is needed

Additional education is sorely needed

Additional IRS Actions Could Help Taxpayers Facing Challenges in Complying with Key Tax Rules »

Government Accountability Office, GAO-08-654 (Aug. 2008)

“IRS should clarify guidance on the combined traditional and Roth contribution limit and pursue options to improve older taxpayers’ compliance with the required minimum distribution rule.”

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