recharacterizing ira contributions
A client called and explained they had been contributing to an IRA monthly for 2007. After having their taxes completed they learned the amount they contributed was not deductible. They contributed 4,200 for 2007 which is non deductible along with the other 21,000 which was deductible in prior years. The client would like to open a SEP and take the 4,200 out of the IRA and use it as a contribution to the SEP which would be deductible. What are the steps to have this amount withdrawn from the IRA and put in the SEP if this can be done. What are the tax consequences if any. Thank you ❓
Permalink Submitted by Denise Appleby on Thu, 2008-04-03 07:14
I may be stating what you already know, but…The client can fund a SEP only if he/she operates a business and has either net income from self-employment or W-2 wages from the business. The contribution would be based on the income received from the business.
If the client wants to use the 2007 IRA contribution to make the SEP IRA contribution, the $4,200 should be removed from the IRA as a return of excess contribution. The amount must include any [url=http://www.retirementdictionary.com/nia.htm%5DNIA%5B/url%5Dto the contribution. The return of excess in effect makes the contribution like it never happened for tax purposes.
Bear in mind that the NIA can be earnings or losses, therefore, the amount returned can actually be less than $4,200 or more than $4,200.
Any earnings on the excess is taxable for 2007