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Attention: Coronavirus Message from Jim

By Jim Saulnier, CFP | April 14, 2020

At Jim Saulnier & Associates, our clients’ and employees’ health and safety is our top priority.  In response to recent developments regarding COVID-19, we want to assure you that we are monitoring information developed by the Centers for Disease Control and Prevention (CDC) and are heeding their recommendations very seriously.

We are committed to keeping our clients, podcast listeners, and fellow neighbors up-to-date with the latest information from Jim Saulnier & Associates concerning coronavirus.  We want to touch base as we all navigate this unprecedented time together to communicate some key points:

Committed to Excellence

Our commitment to excellence and service will not waver during this time of uncertainty.  Your health and safety are our primary focus.  To maintain the utmost precaution for ourselves and others, the staff at Jim Saulnier & Associates have been working remotely on a “trial” basis for the past two weeks and will now continue to do so until further notice.  During our trial run we discovered that the lack of in-person office collaboration hindered our office synergies and face-to-face communication.  This hindrance does result in certain delays in our office procedures.  Although our services may take slightly longer than usual to complete, our dedication to producing quality retirement plans will not be compromised.  Please call the office at (970) 530-0556 if you need any assistance or if you have any questions about how our current office procedures might affect you.  We use an internet-based phone system that connects all of our staffs’ remote workplaces using the same phone numbers and extensions as usual.

Committed to Helping You

We understand that this time is stressful, challenging, and even a bit scary: that’s why we are committed to making ourselves available as best as possible to help you during this time of need.  Although hours are limited, please feel welcome to schedule a 15-20 minute phone call with us to address your questions and concerns.  We are extending this consultation offer in a pay-as-you-go on-demand relationship as scheduling allows.  Regardless of your client status or planning relationship with us, feel free to contact our office at (970) 530-0556 or email us at admin@jimhelps.com to schedule a call or for more information.

Committed to Providing You Resources

During this rapidly changing coronavirus situation, Chris and I have been answering many questions on recent episodes of our podcast The Retirement and IRA Show.  Here we have direct links to some of our coronavirus-related episodes:

We all have made it through hard times before.  We know that we will get through this in the best way possible by staying true to our values of service, integrity and honesty.  Thank you for your continued support as we all do our best to adjust to this challenge.  We sincerely hope everyone remains healthy and safe.



Jim Saulnier

Founder, Jim Saulnier & Associates

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, a Registered Investment Adviser. Jim Saulnier, LLC and Cambridge are not affiliated.

Jim Saulnier and Associates | 970-530-0556 | 506 East Mulberry Street, Fort Collins, Colorado 80524
© 2020 Jim Saulnier, LLC. All rights reserved.
Jim Saulnier, Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC to residents of: CO, IA, IN, MA, NY, TN, TX, WI and WY. No offers may be made to or accepted from any resident outside the specific states mentioned. Jim Saulnier, Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Financial Planning services offered through Jim Saulnier and Associates, LLC., a Registered Investment Advisor. Cambridge and Jim Saulnier & Associates, LLC are not affiliated.

Excess IRA Contributions, Part 3: Fixing Them

By Jim Saulnier, CFP | June 21, 2019

Fixing Excess IRA Contributions 

Albert Einstein is said to have said, “We cannot solve our problems with the same thinking we used when we created them.” So, if we managed to create the problem of excess IRA contributions, we might want to involve a knowledgeable advisor when it comes to fixing excess IRA contributions at the least possible cost.

This article does not cover every aspect of fixing excess IRA contributions. However, it will give you an idea of the complexity, the possible penalties and the seriousness of the problem.

You cannot simply remove the amount of excess contributed. There are specific rules you must follow and timelines you must heed.

The best ‘fix’ will depend on when you discover the excess occurred: whether it’s before or after the due date of your individual income tax return (including extensions), or October 15th of the year following the one where you made the excess contribution.

But first, let’s look at two aspects of excess IRA contributions: penalties incurred and any earnings attributed to excess contributions.

Penalties Incurred 

The penalties for making excess IRA contributions can be a serious matter. First, the IRS will apply a 6% penalty every year that an excess contribution remains in the IRA.

Next, the IRS can go back indefinitely to assess the 6% penalty tax, plus penalties on failure to file and failure to pay, plus any applicable interest. Even if you filed your Form 1040 on a timely basis, the relevant Form 5329 [Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts] is considered a separate tax return, so your failure to file it means the tax may be assessed at any time.

In short, there is no statute of limitations on the 6% penalty. Waiting for the IRS to come after you – while hoping to run out the statute of limitations – is not a workable strategy.

Calculating the Net Income Attributable

Part of rectifying the situation requires determining the NIA, or the Net Income Attributable to that excess contribution, following a special IRS formula. You might seek help in calculating the NIA from the custodian of your IRA account or from a competent advisor.

If you hold multiple IRAs when calculating the NIA, you only need to consider the performance of the specific IRA containing the excess IRA contribution.

The calculation is independent of whether the contribution that created the excess was a standalone investment into a new IRA or was added to an already existing IRA. It will reflect the performance of the entire IRA during the period in question. The NIA will be positive or negative, depending on whether the value of the IRA rose or fell. If positive, you may have to remove the NIA amount, in addition to the excess amount contributed.

Fixing an Excess Before October 15

If you fix the error before October 15th of the year after the error occurred, you can avoid penalties by filling out Parts 3 and 4 of Form 5329, signing it and submitting it to the IRS before the deadline.

However, any NIA earnings while the excess is in the account will be taxable as gross income in the year you made the contribution, not in the year you removed it. As a result, if you have already filed for the year, you will have to file an amended return.

Both the excess contribution and the NIA will have to be removed. Be sure the custodian of the account is kept apprised of any withdrawn asset – which is considered a distribution. The custodian will report the corrective distribution on Form 1099-R.

Any withdrawn NIA-based earnings will also be subject to the 10% early withdrawal penalty if you were under 59½ when it happened.

Fixing an Excess After October 15

The rules are somewhat different if you only fix the excess IRA contribution after the filing deadline (plus extensions), or October 15th.

You still must file Form 5329 and pay the 6% penalty on the excess contribution for every year it was in the IRA. However, you remove only the amount of the excess contribution, on which the IRS will likely assess income taxes.

You do not have to remove any NIA-based earnings. They can stay in the account and are never subject to the 6% penalty. They will only be taxed when eventually withdrawn.

An Alternative Solution

You can also opt not to remove the excess contribution when you discover it, but rather carry it forward into future years. The excess will be reduced each year by your allowable IRA contribution amount until the excess is wiped out. This process is automatic and requires no special reporting. The cost to you will be the 6% penalty as long as any excess exists.

Wrapping up, we know mistakes happen. And as explained earlier, in the case of excess IRA contributions they can happen relatively easily. Fixing them, though, requires the right steps in the right order.

While consulting with someone knowledgeable would likely have avoided the mistakes in the first place, it can certainly ensure they are not compounded. Give our team a call so we can review your situation.

Excess IRA Contributions, Part 2: How They Happen

By Jim Saulnier, CFP | June 7, 2019

How Excess IRA Contributions Can Happen

If you simply put the right amount of money each year in the right IRA account and allowed it to grow until time to withdraw funds, managing traditional IRAs would be smooth sailing. However, both life – and the desire to maximize the returns on your retirement funds – create opportunities to stumble over IRS rules and regulations. Following are four of the most common ways excess IRA contributions happen that could result in the payment of taxes and penalties:

1. Failed 60-day rollover

The IRS allows you to move money around tax-advantaged retirement accounts under three different scenarios. Two of them, ‘direct rollover’ and ‘trustee-to-trustee transfer,’ are relatively error-free since you never touch the money. (The funds move institution to institution.)

The higher-risk scenario is the ’60-day rollover.’ A distribution from a traditional IRA gets paid directly to you, and you have 60 calendar days to deposit the funds in another qualified IRA account (traditional, SEP or SIMPLE).

If you exceed 60 days, the transaction will be considered a distribution, and you will have to pay ordinary income taxes on the funds distributed, plus a 10% penalty for early withdrawal if you are below age 59½. (Some waivers do exist.)

Whereas most people are aware that you can only make one 60-day rollover per year, they don’t realize that it is one rollover per 365 days, not per calendar year. It is a common mistake. Say you make a 60-day rollover in late 2019, then another in early 2020, believing you are in the clear since it is a new year. However, because less than a year has transpired between rollovers, the second one may be treated as an excess IRA contribution, with penalties in addition to being fully taxable to you.

2. Missed Roth IRA Conversion Deadline

Just as you can move funds from one traditional IRA to another, you can also move them from a traditional IRA to a Roth IRA. However, it will require ‘conversion.’ Since a Roth IRA is purchased with ‘after-tax’ dollars, you will have to pay the tax on any untaxed amounts being taken from the traditional IRA.

However, before making the conversion, any RMD due on the traditional IRA must first be taken. The conversion will be of the funds left in the account after distribution of any outstanding RMD. If you don’t satisfy the RMD requirement, the RMD portion of the conversion will be deemed an excess Roth IRA contribution, and subject to penalties.

Regardless of how the funds are transferred from the traditional IRA to the Roth IRA, conversions are considered 60-day rollovers. They will be deemed a failed 60-day rollover (with defined penalties) if you miss the deadline for having the funds back in a qualified account.

3. Required Minimum Distribution Rollovers

With tax-advantaged accounts, the IRS gives you the equivalent of tax deferral over the years, but it eventually wants to start collecting some taxes. It does so through Required Minimum Distributions or RMDs, and each year the amount you need to take out will be based on an IRS formula that reflects your remaining life expectancy. RMD’s are taxed as ordinary income in most cases.

With a traditional IRA, you will have to start taking distributions in the tax year you reach age 70½. (The IRS defines that moment as six calendar months after your 70th birthday.)

You can accumulate the RMDs due from multiple accounts of the same type and pay them all out of one account as long as it is also of the same type. However, you cannot withdraw RMD funds for three traditional IRAs from a 401(k) account, for example.

With rollovers, you have to take any RMD due on a traditional IRA before rolling its funds over into another IRA account. What you roll over will be what is left in the IRA after the RMD. The RMD portion will be taxed. The rollover portion will not be taxed, assuming you haven’t done a rollover in the prior 12 months.

If you do roll funds over before you take your RMD, the RMD portion of that rollover will be considered an excess IRA contribution, and you could face penalties.

Your annual deadline for taking an RMD will typically be December 31, but if it is your first RMD you have until April 1 of the year following the one in which you reach age 70½. However, that would mean taking two RMDs in one year: one by April 1 and the next one by December 31. Both distributions would be included in income for that same year.

If you withdraw more than the RMD for one year, you cannot carry forward the excess to any future years. If you withdraw too little – or miss a deadline – you could be subject to a 50% excise tax on the shortfall of what you should have distributed.

4. Non-spouse Inherited IRA Rules

If you inherit a traditional IRA from a deceased spouse as a beneficiary, the IRS offers considerable flexibility in the actions you can take. However, that flexibility does not extend to you if you are a non-spouse.

As a non-spouse, you cannot treat the inherited traditional IRA as your own. For example, you cannot make any contributions to the IRA or roll any amounts into or out of the inherited IRA. The single act of doing so will disqualify the entire inherited IRA and will cause it to be immediately taxable. There is no remedy for this mistake.

Nor can you combine an inherited traditional IRA with a traditional IRA of your own. If you do so, the funds that were moved from the inherited IRA will be considered an excess contribution in your existing IRA and will be subject to penalties. Also, they will be fully taxable as a distribution from the inherited IRA, and the IRS offers no remedy such as undoing the transaction.

Fixing an Excess IRA Contribution

You now know some of the more common areas where taxpayers make mistakes when managing their IRAs, and next, we will show you how to fix excess IRA contributions when they happen. Meanwhile, an easy call to our office can help you avoid them altogether.

Excess IRA Contributions, Part 1: Basic Qualifications

By Jim Saulnier, CFP | May 24, 2019

Excess IRA Contributions: Basic Qualifications

We hear a lot about how important it is to contribute to an IRA. So, ‘how to contribute correctly’ becomes an important topic. Not that it is difficult, but there are some important rules regarding IRA contribution qualifications that you have to follow.

And since you put money into an IRA to allow it to grow in a tax-advantaged environment, you don’t want to break one of the rules and have it cost you money. One of the main ways that could happen is if you make excess contributions.

In this three-part guide on excess IRA contributions, we are going to review (1) the basic qualifications for making valid contributions, (2) some of the more complex situations you will have to navigate and (3) how you can fix accidental excess contributions and avoid costly penalties.

Why would you want to contribute to an IRA?

In a traditional IRA, your contribution may be fully or partially deductible from the amount of income on which you will be taxed this year. Your contribution will be made with ‘pre-tax dollars.’ Because you won’t pay taxes on those funds now, the portion you would have paid in taxes is also allowed to grow until it is withdrawn, or ‘distributed.’ You will pay the tax upon withdrawal, both on original funds and any gains.

When can you take money back out of an IRA?

You can withdraw money from an IRA whenever you want. However, if you are below age 59½ when you do so, you will pay 10% additional tax on the funds, above your applicable tax rate for that year. From age 59½ forward, you will pay just that year’s applicable tax rate. Then, at age 70½, you will start having to take out Required Minimum Distributions, or RMDs, based on an IRS formula. Not doing so may lead to hefty penalties.

How much can you contribute to an IRA?

For 2019, each person can contribute a total of $6,000 (or $7,000 if you are age 50 or older), as long as you have at least that much in ‘qualified income.’ Anything you contribute above your qualified income will be considered an excess contribution. You have to be particularly careful if you contribute to IRAs being held by multiple custodians (such as authorized banks and brokers), as it is your responsibility to monitor the total, and not the custodians’.

How do you define ‘qualified income’ for contributions?

In general, the IRS defines qualified income as wages, salaries, tips, professional fees, and bonuses. It also includes commissions, self-employment income, alimony, and separate maintenance, as well as nontaxable combat pay. However, you cannot consider Social Security, rental income, investment income, dividends, interest or royalties (among others) in your calculations. Using the wrong kind of income to justify contributing to a traditional IRA puts you at risk of making an excess contribution.

How does spousal income figure into IRA contributions?

You may not have any (or enough) qualified income to justify contributing fully to an IRA. However, if your spouse does and if you file a joint tax return, you can use your spouse’s income to qualify. Each spouse will hold a separate IRA, but the total of your combined contributions cannot be larger than the taxable income reported on the return. If it is, you will be facing penalties for excess contributions.

How long can you contribute to an IRA?  

You can only contribute to a traditional IRA until the year in which you turn 70½. Say you turn 70½ in December of 2019. You cannot contribute at all to a traditional IRA in 2019, even if you were still 69 in early 2019. When in the year you contribute is irrelevant. Any contribution you do make will be considered an excess IRA contribution.

What about Roth IRAs, how do they differ from traditional IRAs?

To start, contributions to a Roth IRA are not tax-deductible, so they are made with ‘after-tax dollars.’ As long as you meet the distribution qualifications, funds will not be taxed when withdrawn. (Remember, you already paid tax on the funds). However, because of the tax advantages Roth IRAs offer on gains, the IRS places caps on the income of those allowed to contribute. If your income is higher, you will have made an excess contribution.

Other differences? You can contribute to a Roth IRA regardless of age, that is, even after you reach 70½. You also do not have to start taking distributions at 70½ but can leave funds there for life.

What next?

Now you have the basic guidelines for contributing to an IRA without being penalized for excess contributions. More complex issues will be reviewed next. However, if you would like to make IRA contributions part of a strategic retirement plan, please reach out to our office so we can help.