SEP IRA (excess contribution)
One-off question – conflicting answers
Business owner funded two SEPs for a single tax year
SEP #1 – $10,000
SEP #2 – $8,000
Owner (unsure of reason) decided he didn’t want the tax deduction – requested the IRA custodial to refund the SEP contribution. The excess ($18,000)was all withdrawn from SEP IRA #1 (which included SEP contributions from prior years)instead of per the contribution allocation.
Question(s)
Was the excess withdrawal required to be taken from each SEP as originally allocated (i.e. $10,000 and $8,000)? The IRA is custodian is saying the excess must withdrawn in the same fashion as originally allocated.
How is the transaction reported on 1099-R and 5498
Thank you in advance for your guidance
Permalink Submitted by Alan - IRA critic on Tue, 2014-11-04 04:03
The IRA 1 custodian should only only treat 10k as a SEP contribution to that account. The additional amount should be treated as a normal distribution and would be taxable unless owner rolls it over within 60 days. The custodian is correct. The SEP 1 should issue two 1099R forms, one coded as an excess contribution return and the other as a normal or early distribution. That will leave SEP 2 with it’s 8k contribution still intact. The 5498 forms will show SEP contributions made to their respective accounts. Therefore, he can only escape from this error if he is still within 60 days of the SEP 1 distributions so he can roll the 8k back.
Permalink Submitted by ShipsnGiggles on Tue, 2014-11-04 16:33
corresponding to your response? Code section(s)?Thank you!
Permalink Submitted by Alan - IRA critic on Tue, 2014-11-04 18:30
IRS Reg attached. Note additional rule c 3. http://www.law.cornell.edu/cfr/text/26/1.408-11