Dear Mr. Slott,
I found your excellent article in Financial Planning concerning excess IRA contributions discovered after the filing deadline. I was hoping you could clarify one point:
Your article states that the IRS does not require the withdrawal of the net income accrued. However, it was not clear in the article whether the 6% penalty applies to the net income accrued or only to the excess contribution itself.
I made an excess contribution of $5,500 to my ROTH IRA in 2015 of which I withdrew in 2017. My CPA and I are now trying to figure out what penalties I owe.
Thank you for your article and for your help in understanding this frustrating issue.
Best wishes,
David
Answer:
David,
The 6% penalty applies only to the amount of the excess contribution. You will need to file the 2015 version of Form 5329 to calculate the penalty you owe, the 2016 form to calculate the penalty for 2016, and the 2017 form to tell IRS that the excess amount has been corrected and that you no longer owe the penalty. Since the penalties for 2015 and 2016 were not paid on time (with your returns filed for those years), you will also owe interest on those penalty amounts. IRS will send you notification of what the interest amount is.Question:
Hello to Whomever is Getting These Emails,
I am the executor of my mother’s estate and also a equal share beneficiary of the will she left, along with my 4 brothers and sisters. My mother passed away in April 2017 at the age of 83, and she left her SEP IRA to her estate. She would have been 84 in October that year, and she had been taking RMDs from her SEP IRA every year, since she was 70½. The IRA custodian allowed the IRA to be transferred by me, the Executor, to Inherited IRAs for each of the beneficiaries in the will.
The IRA Custodian told me that we use my mother’s age to determine the RMD because she originally left the IRA to the estate, but they have sent me an estimated RMD for 2018 indicating that I should use the standard method using my age. The question is: Do we use our ages or my mother’s age to determine the RMD we need to take in 2018 and after?
Thank you in advance for any assistance you can give me,
Dan
Answer:
Dan,
Since the beneficiary of the IRA was the estate and since your mother was over age 70½ at the time of her death, all of the beneficiaries of the will must use your mother’s remaining life expectancy. You will use the Single Life Expectancy Table, look up the age your mother would have been in 2017 (age 84) – the year of her death – to get the factor to use, and subtract one from that factor to get the factor to use for 2018. For each year going forward, you subtract one again to get the new factor for that year.
For example, if the factor for 2017 was 10.2, then the factor for 2018 would be 9.2; for 2019, it would be 8.2, etc. You take that factor and divide it into the prior year-end account balance to get your RMD for the year.
It is important to get the calculation correct. If you do not take out enough each year, the penalty is 50% of what you do not take. Using your own age, as the custodian has suggested, would give you a much smaller distribution and leave you open to the penalty.
