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Slott Report Mailbag: When Does an Employee Age 70.5 Have to Take an RMD?

This week's Slott Report Mailbag includes questions about where to put your IRA money, RMD requirements, and excess IRA contributions. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

My financial advisor told me I was going to have to put money in my IRA in their fee-based account. He said the department of labor was requiring all IRAs to be in fee-based or wrap accounts? That doesn't seem right to me. Can you help me?

Thank you!

ed slott, IRA, tax and retirement planning questions and answers
Send questions to mailbag@irahelp.com

Answer:
The Department of Labor does not require IRAs to be in a fee-based account, including wrap fees. Wrap fees are fees for investment services where the fee is a percentage of money under management. There are many financial institutions that do not charge fees for IRAs or that charge minimal fees. You need to balance the fee against the level of services that are provided for that fee. It is very easy to make a costly mistake with IRA funds. Sometimes you cannot afford free.

2.

When is an employee age 70.5 required to make a RMD (required minimum distribution) from a 401(k)? The employee also has traditional IRAs.

Answer:
In a 401(k), you must begin taking RMDs for the year you turn age 70 1/2. However, if you are still working and are not a 5% owner, distributions may be delayed until you are no longer working, if the plan allows this. This rule applies to all 401(k)s, including Roth 401(k)s.

For IRAs, you must begin taking RMDs for the year you turn age 70 ½, regardless of whether you’re still working. This rule applies to traditional, SEP and SIMPLE IRAs. Under no circumstances can you take a plan RMD from an IRA or an IRA RMD from a plan.

3.

I am 73 years old and retired in March 2012. My pension consists of two components, money I had contributed through the years and money the company contributed through their defined benefit plan. Upon retirement I was given several choices as to how I wanted to take my pension distribution. I chose a lump sum to me with the money I had contributed (some of which was contributed after taxes). The money was sent to my rollover provider to be placed into my pre-existing rollover IRA.

The company component of my pension is being distributed to me in monthly pension checks. I was notified in January 2013 that due to a miscalculation by the company the amount given to me as a lump sum for rollover exceeded the amount of a provision of the Internal Revenue Code of 1986, which only allows a certain percentage of my accrued benefit to be allotted for IRA rollover. What had been given to me exceeded that percentage. I was told that anything over that percentage was considered a “prohibited payment” and needed to be removed from the rollover IRA. It was suggested that I contact my IRA provider to have the excess removed. When I do this, the money ($7500) will be returned to me (as it is money I contributed), and it and its earnings for the past 10 months will become a taxable event. I believe the company should accept responsibility for its error and cover the tax expenses I will incur as a result of this error. Is this asking too much? Do I have any other options for this money other that a taxable event? Thanks for any suggestions or enlightenment you can provide on this situation.

Answer:
The information you have provided is not specific enough for us to be able to definitively give you an answer. Whenever an overpayment occurs in a distribution from a plan, that amount is not eligible to be rolled over. In this case, the $7,500 becomes a regular contribution in your IRA and thus is now an excess contribution because you are past age 70 ½ and not allowed to make an IRA contribution. In some cases, your ex-employer can request that you repay that amount, plus interest, to the plan.

The deadline for removing an excess contribution is October 15 of the year following the year of the contribution. You must inform the IRA custodian that you are removing an excess contribution and follow their procedures to correct the excess. When an excess contribution is not timely removed, it becomes subject to a penalty of 6% per year for every year that it remains in the IRA.

Ideally, you should also tell your CPA so he or she can properly address the excess IRA contribution and correction on your tax return.


- By Joe Cicchinelli and Jared Trexler

3 comments:

Your response to Q#3 states

"The deadline for removing an excess contribution is October 31 of the year following the year of the contribution. You must inform the IRA custodian that you are removing an excess contribution and follow their procedures to correct the excess"

I am under the impression the deadline for returning excess contributions is October 15th (tax filing + exension) of the year following the year of the contribution

Please advise.
Thank you

You are correct -- a typo on our part. The deadline for returning excess contributions is October 15th. To clarify, you do not have to file for an extension to file your tax return. You do however, have to timely file and pay your tax due to qualify for the automatic extension to the October 15th date for removing the excess.

Beverly DeVeny

RMD - Trick question :-)
I am 75 yrs old and still working and deferring money into my 403(B). My employer changed Vendors for our 403(b. If I DO NOT role the old 403(b) Vendor account into the new Vendors 403(b) account will the old account still be considered an employer sponsored 403(b)therefore not forcing me to take RMD's out of the old Vendor 403(b). Or, do I have to roll the old vendor 403(b) into the new vendor 403(b) to continue to not have to take RMD's on that money?
Thank you for your time!

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