Taxpayer set up incorrect account
A client planned to make a contribution to an individual 401K plan for year 2020. Apparently she did not complete the proper paper work and she set up a SEP. She made the contribution in early January 2021. Her income was not that high in year 2020. The contribution was calculated for a 401K plan. The result is that she has over contributed to the SEP plan. She did not go on extension and her return has been filed. I believe I need to amend her 2020 return to correct the amount deducted for retirement. Because she contributed the funds in 2021 the SEP custodian says they can change the paperwork and allocate the excess contribution from year 2020 to 2021. Perhaps this will avoid 1099-R issues. Can you think of any other option for her? Because she did not go on extension I don’t believe she can set up the 401k plan for year 2020 now.
Thank you
Permalink Submitted by Alan - IRA critic on Wed, 2021-07-14 22:08
You are correct. The 2020 return must be amended to deduct only the allowed max SEP contribution for 2020. SEP custodians do not assign contribution years, they must report contributions on Form 5498 only for the year they are made, not necessarily the year the contributions are assigned to on the 1040. Therefore, the excess amount not allowed for 2020 can be reported as a 2021 SEP contribution on Form 1040. Hopefully, no further SEP contributions will be made until her allowed 2021 contribution is determined early in 2022. This activity will not produce a 1099R since no distributions are being made, and excess SEP contributions are avoided. Also correct that it is too late to adopt a 401k plan for 2020.