1. Forgetting to Report Retirement Contributions
Many people make mistakes when contributing to their IRA. Traditional IRA contributions may be deductible, but they still need to be reported on your tax return. Even if you did not qualify for a deduction, reporting the contribution matters because it helps track your after-tax basis.
Roth IRA contributions are not deductible, and they also need to follow income rules and contribution limits. Filing without confirming that your contributions align with IRS rules can cause problems later, especially if you contribute too much.
2. Missing the Deadline for Prior-Year Contributions
Many people do not realize that IRA contributions for the previous tax year can be made up until the tax filing deadline. This creates an opportunity, but it can also create confusion. A common error is assuming a contribution made early in the year automatically counts toward the new tax year.
When you make a contribution between January and the tax deadline, you usually must specify which tax year it applies to. Forgetting to do this can result in contributions being reported incorrectly.
Taking a moment to confirm the tax year can help prevent reporting issues and potential penalties.
3. Reporting Rollovers as Taxable Income
Rollovers are another common source of mistakes. Whether a rollover is taxable depends on the type of accounts involved.
Moving pre-tax money from a 401(k) into a Traditional IRA generally isn’t taxable because both accounts are tax-deferred. This means you don’t pay taxes on the funds when you roll them over. Your funds remain in a tax-deferred account, so you won’t owe taxes on them until you withdraw in retirement, at which point withdrawals are taxed as ordinary income. If you choose to roll pre-tax funds into a Roth IRA instead, you’ll owe income taxes on the amount converted, since those dollars haven’t been taxed yet.
But even when a rollover isn’t taxable, the transaction is still reported to the IRS. If it’s entered incorrectly, the IRS may think you took a taxable withdrawal, which can lead to confusion, unnecessary taxes, or follow-up notices. Making sure rollovers are reported accurately helps keep your tax record clear and your retirement savings on track.
4. Overlooking Required Minimum Distributions
Required Minimum Distributions (RMDs) must begin at age 73 for Traditional IRAs and most pre-tax employer-sponsored retirement accounts, like 401(k)s and 403(b)s. Forgetting to take an RMD or taking the wrong amount can result in hefty penalties.
It’s important to understand that RMDs also count as taxable income, which can increase your tax bill for the year.
Roth IRAs, however, do not require RMDs during the account holder’s lifetime. Keeping a clear list of which accounts require withdrawals and when the withdrawals must be taken can help you avoid last-minute scrambles and unexpected tax surprises.
