Excess SEP IRA Contribution?
Hello –
I know this has been asked before…my apologies. I don’t have time to search through all topics to find the right answer.
In July 2020 (before tax deadline), a client contributed $6,000 to his SEP IRA for 2019. The contribution was intended to be a Traditional IRA contribution for 2019. The accountant included the contribution as a 2019 Traditional IRA contribution on his 2019 tax return. He was not allowed to contribute to the SEP for 2019. I believe this is considered an excess contribution to his SEP IRA? Is it accurate that the contribution plus earnings must be removed? Are there penalties at this point? In order to transfer this contribution to his Traditional IRA and count as a 2019 contribution, what is needed to be done and must the 2019 tax return be amended? What else is missing or needs to be done? Thank you.
Permalink Submitted by Alan - IRA critic on Fri, 2020-08-21 16:18
A SEP IRA can receive either a SEP contribution or a personal contribution. At this point, client needs to determine how the SEP custodian recorded the contribution since Form 5498 will have to identify what type of contribution was recorded when made. If it was a SEP contribution, it cannot be recharacterized as a TIRA contribution, and would have to be removed as an excess with allocated earnings. Such earnings would be taxable in 2020, the year the contribution was actually made. Another option if the custodian recorded this as a SEP contribution and if the client will have net earnings for 2020 is to leave the contribution alone and report it as as a SEP contribution for 2020, not 2019. When the custodian completes Form 5498 reporting a SEP contribution it is reported for the year in which it is made, so this contribution would show as a 2020 SEP contribution. Client would then not report it as either a TIRA contribution OR a 2019 SEP contribution. Therefore, the next step is checking the IRA statement or with the custodian to see what they recorded. That must conform to the tax return. If the tax return turns out incorrect, it must be amended.