SEP IRA counting as retirement plan at work for IRA deductibility
I have an interesting situation. A client works in his own business (taxed as S-Corp) and did a SEP-IRA for 2015, contributing the max allowed based on income of around $22,000. He’s getting his personal taxes done. In addition to the SEP IRA he made $11,000 of Non-deductible IRA contributions ($5,500 for him and $5,500 for his spouse). His spouse does not work.
His CPA is saying that the SEP IRA is not considered being covered by a retirement plan at work and in fact, his W2 from his business does not have the “Retirement Plan” box checked. So his CPA is deducting the $11,000 from income even though his income of around $190,000 is above the deduction limit.
Is this correct? When I look at the IRS page I see:
You’re covered by an employer retirement plan for a tax year if your employer (or your spouse’s employer) has a:
Defined contribution plan (profit-sharing, 401(k), stock bonus and money purchase pension plan) and any contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year;
IRA-based plan (SEP, SARSEP or SIMPLE IRA plan) and you had an amount contributed to your IRA for the plan year that ends with or within the tax year; or
Defined benefit plan (pension plan that pays a retirement benefit spelled out in the plan) and you are eligible to participate for the plan year ending with or within the tax year.
Permalink Submitted by Martin Helmer on Wed, 2016-04-13 21:11
The SEP most certainly is a retirement plan that can cause an X in the w-2 box. A SEP is further a defined contribution plan—-so assuming as of the end of 2015, no SEP Ira ctbn had yet been made. If these are the facts, then the X in the box is required for 2016, not 2015. If the same thing happened a year ago it would yield an X on the 2015 w-2. On the other hand, if even a dollar was contributed to the SEP part of the plan during the calendar year, or if the written plan or a board resolution obligated the SEP, as of 12/31/2015, to make a contribution (unlikely), then the X goes to the 2015 w-2. It’s for the most part a cash basis item. See Notice 87-16.
Permalink Submitted by Alan - IRA critic on Wed, 2016-04-13 21:16
He is a covered participant with respect to the SEP if he made a SEP contribution IN 2015, whether it was for 2014 or 2015. The W-2 therefore might be incorrect in not having the retirement plan box checked. Note that even if a TIRA deduction is available, the taxpayer can opt for a non deductible contribution. The deduction is not mandatory. If he is doing a back door Roth IRA for example and has no other TIRA values, the deduction does not matter for current taxes if the conversion is done the same year, since they offset. However, it does matter in the future since a taxable conversion must be held 5 years before it can be withdrawn without penalty, and a non taxable conversion does not. What the CPA is doing therefore does have various effects depending on what the client wants to do here.
Permalink Submitted by Arek Puzia on Wed, 2016-04-13 21:25
Great, thank you. So in 2014 he had the same business but sold the “legal structure” to someone and started 1/1/2015 with a fresh new LLC. So technically he made a SEP contribution in 2015 but for a business he no longer owned. The new business started as of 1/1/2015 and he did not make the SEP contribution until 2016. The old business was a sole propriatorship LLC and did not generate a W2. He is the only employee in the previous and new business. Does that change anything?
Permalink Submitted by Martin Helmer on Thu, 2016-04-14 14:31
how does the cpa question what’s in notice 87-36? the 2015 contribution (deducted) for 2014 creates a.p. status for 2015.
Permalink Submitted by Martin Helmer on Thu, 2016-04-14 14:32
how does the cpa question what’s in notice 87-36? the 2015 contribution (deducted) for 2014 creates a.p. status for 2015.
Permalink Submitted by Martin Helmer on Thu, 2016-04-14 14:52
The IRAs can’t be deducted, given the current facts.