SEP IRA Excess Contribution
Client made an excess SEP IRA Contribution for tax year 2020, will be removing the excess contribution and earnings before April 15th and redepositing excess contribution and earnings as a 2021 SEP IRA contribution which will work based on expected 2021 profit. The earnings (NIA) are approx. $1,000. My understanding is thou no tax documents will be coming for this until 2021 he must include the NIA on 2020 taxes and not 2021?
If my assumption is correct I’m confused as to why his CPA who told him how much excess to remove and knew he had NIA but not the exact amount yet filed his 2020 pers taxes this week!! CPA is pretty versed in this subject so thought he would wait for the exact NIA figure from me before filing 2020 pers taxes. Hence my question, maybe the NIA on 2020 contribution can wait until 2021 taxes are filed????
Permalink Submitted by Alan - IRA critic on Fri, 2021-02-26 16:14
Yes, the earnings removed with the excess are taxable and perhaps subject to penalty in the year the excess SEP contribution was made. If that was in 2020, the earnings are taxable on your 2020 return. Include an explanatory statement with your return about the excess amount, removal, and the amount removed including earnings. Then when the 1099R is issued next January, you will already have reported the correction.
If the 2020 SEP contribution was made in 2021, that would explain what the CPA did. Another option is to leave the “non deductible contribution” in the plan and then apply the SEP excess to 2021 using Form 5330, however the excise tax is 10% for that, and it is clear by the removal plan that the CPA was not planning on this solution.
The NIA on excess contributions made in 2020 cannot be reported on 2021 taxes. The code on the 1099R issued by the custodian reporting the removal will make it clear which year the earnings are to be reported for.