Handling Traditional IRA contributions when transferred to a SEP
A client of mind is self-employed. They started 2023 with a traditional IRA and made 6k in contributions. About halfway through the year, they opened a SEP IRA and transferred the entire balance of the traditional IRA into the SEP, 2023 traditional IRA contributions included. They have added another 6k to the SEP since.
I am trying to figure out if there is anything that needs to be done to account for this. Will the traditional IRA contributions from earlier in the year automatically be considered SEP contributions since they were transferred in the calendar year? I am worried about this being considered a contribution to both a traditional IRA and a SEP since they are above the income limit to deduct traditional IRA contributions with access to an employer plan. They are a single filer.
If anyone has any ideas, I would really appreciate it. Can’t find a good answer anywhere and Schwab was no help. Let me know if I am leaving any important information out. Thanks!
Permalink Submitted by Alan - IRA critic on Mon, 2024-01-15 16:16
Client needs to check the SEP IRA statement to determine if the second contribution was coded as a SEP contribution or a TIRA contribution, and if a TIRA contribution the year that contribution is for. If coded as a 2023 TIRA contribution, that creates an excess contribution which must be removed with associated gain or loss. SEP contributions and personal contributions cannot be changed by recharacterization, so any excess must be removed. In addition, the non deductible TIRA contribution must be reported on Form 8606 as such. A SEP IRA account can contain both types of contributions, but making personal TIRA contributions to a SEP IRA is prone to miscoding as a SEP contribution, therefore if client just wants to maintain one SEP IRA, they must be very careful to have any contributions properly identified as either SEP or personal contributions.
Permalink Submitted by Brendan Gallagher on Mon, 2024-01-15 16:35
Thank you for the reply. The second contributions were coded as SEP contribiutions. I am trying to figure out the best thing to do with the TIRA contributions from earlier in the year. Should those be removed and then the client can make additional SEP contributions for that amount? Thanks again.
Permalink Submitted by Alan - IRA critic on Mon, 2024-01-15 17:20
SInce client cannot deduct the TIRA contribution, perhaps they should be returned and recontributed as a SEP contribution, assuming client has sufficient net earnings from SE. A SEP contribution done in 2024 can be assigned on client’s tax return as either a 2023 or 2024 SEP contribution.