IRA errors that cost taxpayers money (and how to fix them)

When working with IRAs, you face more than just contributions and withdrawals. From correcting excess contributions to navigating the pro-rata rule and backdoor Roth strategies, you need to be ready for the full scope of client challenges.

Knowing how to apply for penalty waivers and accurately report conversions can make all the difference in avoiding costly errors and offering valuable guidance.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: When an IRA is payable to a trust and is liquidated immediately upon death, do the beneficiaries pay the tax on their share?

A: Yes. The trust initially recognizes the income, but if it distributes the IRA proceeds in the same year, the trust gets an income distribution deduction, and the beneficiaries report the income on their personal Form 1040, U.S. Individual Income Tax Return.

Q: When does the 10-year period begin?

A: Distributions must begin by Dec. 31 of the year after the year in which the deceased owner died.

Q: What is the §691(c) deduction?

A: It’s the income in respect of a decedent (IRD) deduction. This federal deduction helps offset income tax on assets already taxed at the estate level. It is claimed on Schedule A, Itemized Deductions, of Form 1040.

Q: Can a taxpayer establish a checking account in an IRA to write QCD checks?

A: Yes, but conditions apply:

• The taxpayer must be 70½ or older on the date the check is written.
• Check must be payable directly to a qualified 501(c)(3) charity.
• It must be cashed by Dec. 31 for the distribution to count that year.