SEP Excess Contribution
During July 2012 my employer (me) contributed more to my SEP than my 2012 taxable income would ultimately support. I also cannot re-characterize the excess to be considered a Traditional IRA contribution because I already made the maximum Roth IRA contribution for 2012.
I just asked my brokerage firm to remove the excess SEP contribution for 2012. However the brokerage firm won’t process the transaction because they said 10/15/13 was the deadline for processing removal of excess contributions for 2012.
I took the proper SEP deduction on my tax return which was based on 25% of my income, but still there is an excess amount in my SEP that my custodian won’t remove from the account.
Is my custodian correct? If they are correct, what should I do next to remove the excess?
Thank you!
Permalink Submitted by Alan - IRA critic on Wed, 2013-11-06 21:11
They are correct as to the 10/15 deadline to remove the excess on a timely basis. Now that the deadline has passed, you owe a 10% (not 6%) excise tax for 2012 on Form 5330 (Code Sec 4972). If you will be eligible for a SEP IRA contribution for 2013 you can apply the excess from 2012 to 2013, deduct it in 2013 and reduce your 2013 contribution by the amount carried over from 2012. You still owe the excise tax for 2012 whether you carry the excess over or remove it. If you plan to remove it, you need to get it out before year end to avoid another excise tax for 2013.
Permalink Submitted by chris erickson on Fri, 2013-11-08 20:29
Unfortunately 2012 was my last year of having any self-employed income, so are you saying I can still “apply” the excess from 2012 to 2013 even though the contribution occurred in calendar year 2012?Please allow me to summarize and please comment. I should:1. pay the excise tax on 2012’s excess contribution via an amended 2012 tax return2. then consider the 2012 excess to be an excess contribution for 2013 (even though it happened in 2012 and I have no self-employment income in 2013), and remove the “2013 excess contribution”? Thanks again for your thoughts.
Permalink Submitted by David Mertz on Sun, 2014-06-15 14:51
Alan, I think you might have overlooked section 402(h)(2) which says that an excess contribution to a SEP IRA by the employer is considered to have been paid to the employee and then contributed by the employee as in individual contribution. This would make such an excess contribution not removed by the due date of the return subject to only a 6% excise tax on the amount that the contribution exceeds the amount that the employee is eligible to contribute to an IRA on his own.
Permalink Submitted by Michael Dougherty on Tue, 2017-04-04 17:48
You would need to amend your tax return for the year of the excess, correct?
Permalink Submitted by Alan - IRA critic on Fri, 2013-11-08 21:46
Note from prior post that you can only apply a 2012 excess to 2013 if you are eligible for a SEP contribution for 2013. SInce you will not have SE income in 2013, you cannot apply the excess, you can only remove it. Therefore, file the 5330 with a 1040X for 2012 and pay the 10% excise tax. The IRS might bill you some late interest for the late payment. Then remove the 2012 excess amount prior to 12/31/2013 to prevent another year of the penalty accruing. Just ask the custodian to send you the excess amount (no earnings calculation applies). You will need to attach an explanatory statement to your 2013 return regarding this distribution explaining that it was an excess SEP contribution that you could not deduct for 2012, and therefore the distribution is not taxable.