IRA/SEP
Hello-
Client made a Traditional IRA contribution last year. They are also wanting to set up a new SEP for 2023 and make a contribution. I believe I was told on here that they wouldn’t be considered covered by a retirement plan for 2023 in this situation. Their tax preparer disagrees.
If they are just wanting to follow what their tax preparer says, what are their options?
- They could skip the SEP and just max out the Traditional.
- They could recharacterize the Traditional IRA to Roth and then make SEP.
- They could report the Traditional IRA as nondeductible.
- They could undo the Traditional IRA contribution and earnings as excess.
- I know employees can make IRA contributions to a SEP but can SEP contributions be made to a Traditional IRA? In other words, could he just say those contributions were SEP contributions and not touch them? SEP wasn’t set up at time of making contribution.
- Tax preparer mentioned something about recharacterizing the Traditional IRA contribution to a SEP? Is that actually an option?
Thank you!
Permalink Submitted by Alan - IRA critic on Fri, 2024-04-05 22:52
Tax preparer should pull up Notice 87-16. A SEP IRA falls under the Defined Contribution plan rules, therefore if no SEP contribution was actually made in 2023, taxpayer is not an active participant in 2023.
Options 1-4 are all possible if client chooses to take such actions, but 3 is not advisable if 2 can be done.
Q 5 may be possible, but most IRA custodians will not recode a TIRA contribution as a SEP contribution.
No. Contributions cannot be recharacterized between SEP (an employer contribution) and a TIRA (a personal contribution). Client’s custodian should confirm that.