Splitting Hairs?
My client’s CPA says that he over-funded his SEP by $2524. In the 69 days since his last contribution on February 4, the account value is up 6.13%, an increase of $154.72 on the $2524. To free up cash for the withdrawal, we’ll need to sell shares of a mutual fund, and the trade won’t settle until Monday. If we take the money out then, it will be one business day or three calendar days past the 15th. Assuming the worst (three days), and pro-rating the 6% penalty we’d take three 365ths of 6% of $2678.72 and his penalty would be $1.32. Neither the client nor I are concerned about these little numbers, but neither do we want to offend the sensitivities of the IRS. What’s your advice?
Permalink Submitted by Alan - IRA critic on Wed, 2016-04-13 19:48
Excise taxes do not get pro rated. The main challenge here is that the deadline to remove an excess contribution is the due date (4/18 this year), or the extended due date (10/15) which applies if an extension if filed or the tax return is filed on time. Therefore, filing the return or an extension on time is the largest concern. Any earnings on the excess amount will be taxable in 2016, not 2015 because the excess contribution was made in 2016, therefore the amount of earnings applied to the 2015 excess amount is not needed to file the 2015 return. Also, in an excise tax for an excess SEP contribution is due as a result of missing these deadlines, the rate is 10% for an excess SEP contribution, not 6%. The 154.72 figure is based on a corrective distribution as of today, but market changes will change the amount of gain right up until the day the corrective distribution is processed, so the exact amount cannot be determined till the processing day. Again, the CPA does not need to know the earnings figure, just that the 2524 plus earnings are being withdrawn so he can get the return filed on time. The SEP deduction can only be the allowed deduction amount.