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Leslie Bonacum
Neil Allen

Now’s The Time For IRA Action, CCH Advises

(RIVERWOODS, ILL., March 27, 2001) – As the deadline for filing federal taxes approaches, so does the deadline for making – or unmaking – contributions to traditional, Roth and educational IRAs, according to CCH INCORPORATED (CCH), a leading provider of business and tax law information and software.

Since the regular April 15 filing date falls on Sunday this year, those who own (or wish to set up) traditional and Roth IRAs may have until Monday, April 16, to make contributions to them for the year 2000.

Beth Steele, JD, editor of the CCH Individual Retirement Plans Guide, advised that it’s best to check deadlines with the financial institution holding an IRA. "Some will take IRA contributions for 2000 only if they’re made several days before the deadline to allow for internal processing," Steele said.

One advantage of contributing close to the deadline is knowing last year’s income through statements like W-2s and 1099s. IRA owners now can see how close they are affected by the phaseouts based on adjusted gross income that limit their eligibility to make contributions, and can plan their moves accordingly.

For example, if a Roth IRA owner’s income ended up topping the $160,000 income limit for joint filers, knowing this fact now can avoid excess contributions. By contrast, if the Roth IRA owner had made a contribution in November 2000, expecting her income for 2000 to be $140,000, a year-end $20,000 bonus might have put her over the income ceiling.

Excess contributions to any type of IRA are subject to a penalty in the form of a 6-percent excise tax.

Three Ways To Correct Over-Contributions

"If IRA owners discover they have over-contributed, they have a variety of ways of undoing the excess contribution to avoid the penalty," Steele noted.

One method is simply to remove the excess contributions by April 16, or by the extended filing date for those who apply for extensions.

Another possibility is to correct the too-big contribution by carrying forward the excess and under-contributing in the next year. This involves lowering the 2000 contribution to an acceptable level and using the excess as a contribution for 2001.

Finally, it’s possible to correct the overage by recharacterization of the contribution – for instance, from a Roth IRA contribution to a traditional IRA contribution. Note that non-deductible contributions to a traditional IRA are acceptable no matter how high the IRA owner’s income.

In this instance, a single person covered by an employer’s retirement plan with an income of $100,000 may want to invest $2,000 in a Roth IRA, but due to her income level is only eligible to make a contribution of $1,340. She could put the remainder of $660 to a traditional IRA as a nondeductible contribution. Those making nondeductible contributions should be sure to file IRS Form 8606.

Extensions Can Help Sort Out IRA Concerns

IRA owners who think they can’t meet the April 16th deadline for sorting out their accounts can obtain an extension of time to file.

"With an extension, they can re-target the tax filing date to August 15th. Extensions can add flexibility, expand options and stretch IRA dollars. With an extension, people can take up to four months or more to gather paperwork, get advice and plan some IRA strategies," Steele said.

An extension can relieve the time crunch for IRA owners who need more time to:

  • figure out their tax returns or find professional preparers;
  • get the right financial advice for lowering taxes using an IRA;
  • correct excess contributions;
  • recharacterize an IRA contribution made in 2000; or
  • collect statements, such as K-1 forms filed by partnerships, to figure income and deductions.

The four-month extension is automatic. To get it, taxpayers just fill out Form 4868 and file it with the IRS by April 16th. But Form 4868 is an extension to file, not an extension to pay. This means taxpayers must pay a close approximation of actual tax due with the form to avoid interest and penalties when they finally file their returns.

Distributions Have Refreshing Twist This Year

Just as there are rules about not putting too much into an IRA, there are also rules that require that a certain amount be withdrawn in certain circumstances.

New rules from the IRS simplify the required minimum distributions (RMD) that a traditional IRA owner must withdraw each year beginning soon after age 70 .

The good news is that when it comes to taking RMD applying to 2001, IRA owners have a lot to look forward to with the new rules. For starters, generally lower dollar amounts may be withdrawn. That's a boon to folks who want to take the least possible amount from their IRAs. A uniform table of life expectancy lowers this amount for most people.

In addition, there is no need to determine the designated beneficiary and there’s no need to make an irrevocable election to recalculate or not to recalculate life expectancy each year. Also, special rules for trusts are eliminated.

For those who will reach age 70 in 2001, now is their last opportunity to make a contribution to their traditional IRA for the year 2000.

But, there is bad news for those who turned age 70 in 2000 and who delayed taking their first distribution applying to 2000 until 2001. The bad news is that they must stick with the old rules.

For 2001 distributions, IRA owners may elect either the old rules or the new.

"And everyone should remember there are no age limits for contributing to a Roth IRA, and no required distributions, at least during one’s lifetime, either," Steele observed.


CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, finanical services, insurance, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at

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