SEP
Client open a SEP at the begining of 2011 and makes a contribution. In April he terminates the SEP and the contribution is returned to him. Does he have any tax issues?
Client open a SEP at the begining of 2011 and makes a contribution. In April he terminates the SEP and the contribution is returned to him. Does he have any tax issues?
Permalink Submitted by Alan Spross on Mon, 2011-05-09 23:22
Yes. The contribution is deductible for the year it is made, ie either 2010 or 2011. Then for 2011, the distribution is taxable and subject to the 10% penalty if under 59.5. In addition, he is deemed covered by a retirement plan for 2011, so any regular TIRA contributions made may not be deductible. This is how the SEP custodian will report to the IRS and client’s return must reflect the 1099R and 5498 received next January from the custodian.
Permalink Submitted by Robert L. Wolff on Tue, 2011-05-10 14:13
If no deduction was claimed for the 2011 SEP contribution, the contribution was return in 2011, and the SEP was terminated in 2011, is the return of contribution still taxable?
Permalink Submitted by Alan Spross on Tue, 2011-05-10 19:38
Unlike a traditional IRA contribution, there is no provision for making a SEP IRA contribution (documented by custodian and reported on Form 5498) that is not deducted. There is no provision for reporting it on Form 8606 like there is for a non deductible TIRA contribution. Since the IRS does not address this possibility, there is no way to predict what would happen if client opted to NOT deduct the contribution on his 2010 return and in effect treated it as if it was a TIRA contribution and not a SEP contribution. Client would have to complete an 8606 and that would then attempt to create a basis for him distributing the contribution in 2011 without paying tax. If the SEP contribution was for 2011 (not 2010), you would not have the taxable income transfer issue, but the IRS could still require the 2011 reporting to be correct.
Put another way, there is no provision for this treatment which would transfer increase taxable income in 2010 and reduce it in 2011. While the actual reaction of the IRS to this attempt is anyone’s guess, I would not recommend it. And if the contribution was a 2011 contribution (year had to be reported to SEP Custodian), it would be a wash, so nothing gained by not reporting it correctly.
In other words, if he does NOT report the SEP Contribution, then he risks double taxation because the IRS will be looking for the distribution to be taxable.