Recharacterization of a “SEP IRA” contribution to following
My client contributed $4,800 to his SEP IRA during tax year 2010 through automatic monthly contributions to his Variable Annuity – SEP IRA account, i.e. $400 per month. On April 15th he called and said that his accountant said he over contributed $511 to his SEP IRA based on his net Schedule C for self-employment income and he needed to recharacterize the $511 for 2010 to tax year 2011. The accountant only took a tax deduction of $4,289 for tax year 2010 on his return. But he actually contributed the $4,800 to the SEP IRA account. We want to move the $511 as a SEP IRA contribution for year 2011. We called the VA company and they said he would do that on his end as they do not track or report the year the contributions were made for in his account within their VA. Is this as simple as stating within his personal file that the $511 was forward from a 2010 tax deduction to a 2011 deduction or does he have to file a form with the IRS?
Permalink Submitted by Alan Spross on Tue, 2011-04-19 03:25
Correct, it is not as simple. The excess contribution can be carried over to 2011, but at the cost of a 10% excise tax reported on Form 5330. The 2011 contribution would then have to be reduced by the $511 applied from the 2010 excess.
It would cost considerably less to have the excess amount with allocated earnings removed from the SEP IRA in the same manner as a regular IRA excess contribution. Any earnings would be taxable in the year the excess contribution was actually made, in this case in 2010. An early distribution penalty of 10% would apply to the earnings. This would be less costly unless there was a large earnings component on this excess amount.
If the return has been filed, it can be amended or if neither of the above options were applied then it must be amended.
The VA company is correct with respect to the carryover option, which is handled strictly by the Form 5330 filed with the client’s taxes.