SEP IRA Contribution Withdrawal

Submitted by John Benjy on Sun, 2015-02-08 00:28

For tax year 2012 I made a contribution of $13K into my SEP IRA. The 13K just sat in the Brokerage account in cash. I found from the CPA that I should not take any income for 2012 until I am registered with the state for the Investment Advisory Business. In 2014, I amended 2012 personal tax returns and the business tax returns and took out $13K from the SEP IRA by Apr’15 2014. The 1099-R I received from the brokerage has the below info.

1. Gross distribution: 13K
2(a). Blank
2(b). Taxable amount not determined: X
7. X
Numeric distribution code: 1-Early Distribution – No Known Exception.
Alpha distribution code: None Selected

When I enter the above info in the tax preparation software, the Federal and State Tax I owe increased by $5,900. I was of the understanding that I only need to pay a penalty of 6% for every year the funds are in the SEP IRA ie., 6% of 13K =$780. Wondering if I am missing anything.

Thanks in Advance,



Submitted by Alan - IRA critic on Sun, 2015-02-08 02:25

  • I come up somewhere in between. Your distribution is not taxable because you amended your 2012 return to eliminate the SEP contribution deduction. Therefore, the return of your contribution after the due date comes under Sec 408(d)(5) and is not taxable because it was not deducted. As it is non taxable, it is also not subject to the early withdrawal penalty. To arrive at this you need to find a way to get the software to accept 0 in Box 2a.
  • Now for the bad news. An excess non deductible contribution to a SEP IRA falls under Sec 4972. These excess contribution excise taxes are 10%, not 6% and reported on Form 5330, not 5329. You would owe 1300 for 2012 unless you already included this with your 2012 1040X. You would also have to file a 2013 1040 X since the excess was still there on 12/31/2013 and that is another 1300. You removed the excess in 2014 so there is no excise tax after 2013.
  • Total is 2600 and the IRS could bill late interest, but that would not be much. Better than 5900, but more than 780.

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