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When it comes to individual retirement accounts (IRAs), the opportunities for errors are seemingly endless — and costly. With roughly 58 million US households owning IRAs, even one misstep with rollovers, account types, or required distributions could result in unexpected taxes or penalties.
To help prevent that, retirement expert Denise Appleby, CEO of Appleby Retirement Consulting, shared common pitfalls and real-life examples on a recent episode of Decoding Retirement.
Among the most frequent and overlooked mistakes? Ignoring IRS Form 5498, officially titled “IRA Contribution Information.”
This form reports IRA activity such as contributions, rollovers, conversions, fair market value (FMV), and required minimum distributions (RMDs). The form is so often overlooked because, in 2024, for instance, custodians weren’t required to issue it until May 31 — well after most people file their returns.
“So you have already done your tax return, you get this form and you’re thinking, ‘I’ll just file it away because my accountant doesn’t need it,'” Appleby said. “But you need it — and maybe you should share it with your accountant.”
Read more: What is a financial adviser, and what do they do?
In one case Appleby highlighted, a woman opened what she believed was a traditional IRA. Years later, after a name change and a custodian update, the word “Roth” was removed from the account title, even though the account remained a Roth IRA.
Assuming it was a traditional IRA, she made deductible contributions and even rolled over a 401(k) into it, thinking the rollover was tax-free.
“Turned out that it was taxable because she processed a Roth conversion without knowing it,” Appleby said. The resulting tax liability? Possibly up to $1 million.
US tax form focused on the Amount You Owe line. (Getty Images) ·SilverV via Getty Images
The mistake could have been caught earlier had she reviewed Box 7 of Form 5498, which identifies the account type (Traditional, SEP, SIMPLE, Roth).
To avoid similar issues, Appleby suggested that every IRA owner conduct a yearly self-audit.
With Form 5498, confirm your account type (Traditional, SEP, SIMPLE, Roth) in Box 7 and check your rollover contributions (Box 2) for accuracy. Form 1099-R lists distributions, which you’ll also want to review.
“If you took a distribution,” Appleby said, “is it coming from the correct type of account? Is it reported as a direct rollover when it should be?”
If you’re 73 or older, you’re required to take a required minimum distribution each year. RMDs are based on your account balance and IRS life expectancy tables.
While the formula is straightforward, using the wrong table or a misstated balance can cause errors. And you are responsible for the accuracy — even if the custodian made the mistake.
“If you took out a million dollars in December and rolled it over in January,” Appleby said, “your custodian won’t have that on record — and your RMD will be understated.” To make sure your RMD is correct, you will need to refigure the amount by adding back the million dollars to your year-end fair market value.
Grandfather with grandson sitting on the beach next to a sand castle decorated with US flags, watching the sea, on July Fourth. (Dünzl\ullstein bild via Getty Images) ·ullstein bild via Getty Images
You can delay your first RMD until April 1 of the following year — but doing so means you’ll need to take two distributions that year, potentially bumping you into a higher tax bracket.
“Talk with your CPA about whether it makes sense to split the income across two years or take both RMDs in the same year,” Appleby advised.
If you fail to take an RMD, you could face a 25% excise tax. But there’s good news: If you take the RMD during a correction window, the penalty drops to 10%.
And in many cases, the IRS will waive the penalty altogether if the missed RMD was due to reasonable error. To request a waiver, file IRS Form 5329 and attach a letter explaining what went wrong.
“They’ve never denied a request that I consulted on when the reason is reasonable,” Appleby said. “Tell the IRS how much you took, how much you didn’t take, and ask for a waiver. You attach a nice letter … and you send it in.”
Even multiyear errors can be forgiven: Appleby said she’s worked on cases where the IRS approved requests for cases with 10, 15, and even 18 years of missed RMDs.
Appleby warned that when the IRS denies a request, it’s typically because the form was filled out incorrectly, as many CPAs are tripped up by Form 5329’s language.
“In the spot where it says how much do you owe, you put zero,” she said. “If you put any other amount, the IRS will take that as your acknowledgment that you owe them and come after you for that money.”
Rolling over a 401(k) to an IRA is common but still fraught with pitfalls.
“Here’s the No. 1 mistake that I see happening,” Appleby said. “You tell your custodian, ‘Do a direct rollover to my IRA’ — and the account turns out to be a Roth IRA instead of a Traditional IRA. So here you have an unintentional Roth conversion.”
Always verify the destination account type before initiating a transfer. Also, check your 401(k) for after-tax contributions or employer securities — both of which can offer strategic planning opportunities if handled properly.
Read more: What is a 401(k)? A guide to the rules and how it works.
Many rollovers from retirement accounts must be completed within 60 days to avoid taxation. But if you miss that deadline, you may still have options.
“Usually, you do a rollover because you want to have the amount excluded from income,” Appleby said.
If the error was due to something beyond your control, you can use the self-certification process — a no-fee, do-it-yourself fix — as long as you meet the requirements.
The key: Act within 30 days of when the circumstance (e.g., illness, disaster) ends, and don’t have a prior denied IRS waiver on record.
Got questions about retirement? Email Robert Powell at yfpodcast@yahooinc.com, and we’ll do our best to answer it in a future episode of Decoding Retirement.
Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service.
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