SIMPLE IRA contributions that were not deducted
Client has been making contributions to a SIMPLE IRA for several years. However, for past few years, the contributions were not deducted from income tax on tax return as the client’s business expenses resulted in no taxable income.
What needs to be done, if anything, about the non deducted contributions that were made?
Are they allowed? Are they deemed excess contributions? Do they need to be removed, as well as the interest earned on them? At what penalty?
Thank you
Permalink Submitted by Alan - IRA critic on Fri, 2013-09-20 19:24
If client files a Sch C and has no “net earnings from self employment”, then no SIMPLE IRA contribution may be made and an excess IRA contribution exists for these years. This is similar to a traditional IRA contribution when the taxpayer has no earned income. The 2012 excess can be handled in the usual manner distributed with allocated earnings, but the prior year excess contributions must be withdrawn and reported on Form 5329 this year and the 6% excise tax must be paid along with 5329 forms for each year prior to 2013. The IRS may bill interest on these payments, but the real challenge will be convincing the IRS that no deduction was ever taken and therefore no taxes should be due on the distributions. Client may need to provide copies of prior returns that showed no SIMPLE IRA deduction.