Excess IRA Contributions for 2013?

[umfundi]

Just to be sure I have it straight:

I am "retired" with a pension but also plenty of earned income from a consulting job.
Wife is retired with no earned income.
Kid 1 is employed with income > $6k
Kid 2 is a high school senior, part time employed and earned $6,500 in 2012.

I have the cash available and intend to fund 2013 IRAs to the max. for all of us later this week. Am I correct that excess contributions do not matter, so long as they are corrected by the time we all file our 2013 returns? In particular, Kid 2 goes to college next year, he may not have $5500 in earned income for $2013.

So far as I can see, excess contributions can be corrected without penalty at the end of next year. Right?

My plan is to fund the IRAs and, if needed, fix the amounts at the end of 2013. I just want to be sure there are no penalties if the corrections are made before tax returns are filed.

Keith

[Calm Man]

Why wouldn't you wait until you see what the "kid" earns and then if enough, fund the IRA?

[umfundi]

Why wouldn't you wait until you see what the "kid" earns and then if enough, fund the IRA?

Because the money is available, I've made the plan, and there is no downside? I "lost" some gains last year (2012) by funding IRAs late.

Keith

[Epsilon Delta]

The penalty for excess contributions is your choice of:
* 10% (plus ordinary income tax) on any earnings you have to withdraw.
* 6% of the contribution (leaving earnings in the IRA).

And some paper work.

[runner9]

I "lost" some gains last year (2012) by funding IRAs late.

Because the market had a good year, if it has a down year in 2013 the reverse would be true, but that's another discussion...

[umfundi]

The penalty for excess contributions is your choice of:
* 10% (plus ordinary income tax) on any earnings you have to withdraw.
* 6% of the contribution (leaving earnings in the IRA).

And some paper work.

Really? I doubt that is correct, if the excess contributions are withdrawn before the tax deadline. I guess, back to Google. Do you have a source?

Keith

[Epsilon Delta]

The penalty for excess contributions is your choice of:
* 10% (plus ordinary income tax) on any earnings you have to withdraw.
* 6% of the contribution (leaving earnings in the IRA).

And some paper work.

Really? I doubt that is correct, if the excess contributions are withdrawn before the tax deadline. I guess, back to Google. Do you have a source?

Keith

Pub 590. Whether to withdraw the excess before or after the tax deadline is a choice you are free to make.

[hillman]

The penalty for excess contributions is your choice of:
* 10% (plus ordinary income tax) on any earnings you have to withdraw.
* 6% of the contribution (leaving earnings in the IRA).

And some paper work.

Really? I doubt that is correct, if the excess contributions are withdrawn before the tax deadline. I guess, back to Google. Do you have a source?

Keith

Pub 590. Whether to withdraw the excess before or after the tax deadline is a choice you are free to make.

The 6% excise tax is per year, not a one time 'fee.' Page 46 of the 2011 publication. Also, the early withdrawal penalty would be in addition to the excessive contribution penalty (though there are exceptions to correcting the over contribution).

[Alan S.]

The penalty for excess contributions is your choice of:
* 10% (plus ordinary income tax) on any earnings you have to withdraw.
* 6% of the contribution (leaving earnings in the IRA).

And some paper work.

Really? I doubt that is correct, if the excess contributions are withdrawn before the tax deadline. I guess, back to Google. Do you have a source?

Keith

Pub 590. Whether to withdraw the excess before or after the tax deadline is a choice you are free to make.

The 6% excise tax is per year, not a one time 'fee.' Page 46 of the 2011 publication. Also, the early withdrawal penalty would be in addition to the excessive contribution penalty (though there are exceptions to correcting the over contribution).

The 6% annual excise tax on excess contributions is mutually exclusive with the 10% early withdrawal penalty on earnings. The extended due date is when the earnings would no longer be eligible for distribution with the excess contribution and the 6% excise tax for the prior year is triggered instead. There are a few cases when intentionally allowing the extended due date to pass will be of benefit. But then you would want to withdraw the excess before the end of the second year to prevent another 6% excise tax from accruing. There is no statute of limitations for excess contributions, although the IRS has so far been reluctant to levy multiple year taxes and interest when they discover an old uncorrected excess contribution.

Under Form 5329, if you have an excess contribution and are eligible to make an IRA (of that type) contribution for a year that you did not make, your excess is automatically applied to the unused space and the excise taxes would end without any distribution being made.

[Karamatsu]

There is no statute of limitations for excess contributions, although the IRS has so far been reluctant to levy multiple year taxes and interest when they discover an old uncorrected excess contribution.

That's interesting. Do you have a source for that (the reluctance to impose multiple-year taxes/interest)? Unfortunately I have found them very willing to impose multiple-year taxes and interest, going back more than a decade. If they are imposing these penalties on some, but not on others, then depending on the reasons it could leave them open to legal action. But in any case, from hard, hard experience, do not count on them being reluctant to impose any taxes or penalties they think they can, even when they're wrong.

On the other hand, you can withdraw excess contributions without penalty or tax if you do so before the due date of the return for the year of the contribution. You just have to be sure to withdraw (in addition) any interest or earnings that may have accumulated on the contribution. If there is a loss you can then take the loss as well. Usually all of this is handled by filling out a form and sending it to your broker. They then do the calculations to allocate interest/earnings to the withdrawn contribution amount. See IRS Pub. 590. As far as I can see (I'm not a professional) there is no disadvantage to making an IRA contribution in the first week of January as long as you check your eligibility toward the end of the year and adjust accordingly.

The reason for the flexibility is obvious... nobody actually knows for certain what their annual earned income will be. Some will lose their jobs and make less than they expect. Some will do well and make so much that they end up over the limits. Some don't have a salary but depend on selling their wares as they go.

Note that in addition to withdrawing contributions you can also recharacterize them. There is a lot of flexibility as long as you don't go past the tax filing deadline. After that, you're cooked, and must deal with the issue as quickly as you can. The penalties add up very quickly.

[umfundi]

Just for the record, I have today funded all accounts to the max.

If the younger son does not earn $5500 because he is at college and not in high school, I will deal with it in December.

I think the other accounts will be OK.

Keith