Excess SEP IRA Contribution
A client contributed $5k to his SEP IRA in January 2021 which was coded as a 2020 contribution. After doing his taxes for 2020 (he filed for an extension and has not filed yet), his accountant claimed a lot of business expenses that drove his income down quite a bit. As a result, only $725 of the $5,000 contribution can be claimed as a SEP deduction on his 2020 tax return. We would like to leave the money in the SEP IRA for 2021 contributions. Do we need to impute and remove the gains on this transaction attributable to the 2020 excess contribution amount even though the money could have been put in as a 2021 contribution? Is this the only way to avoid the penalty? Or can we ask the custodian to treat the amount as a 2021 contribution and avoid all penalties since done before the extended filing deadline?
Permalink Submitted by Alan - IRA critic on Fri, 2021-08-06 15:21
A SEP contribution is always reported in the year actually made, so a contribution made in 2021 will be reported as a 2021 contribution on Form 5498. However, taxpayer can deduct it on the 2020 return if they wish. Therefore, on this situation taxpayer is limited to a 725 deduction, and the remaining 4275 can be deducted on the 2021 return.
It is possible that the custodian coded the contribution as a TIRA contribution and not a SEP contribution. A TIRA contribution can be made to a SEP IRA and is reported on Form 5498 like any other TIRA contribution, so if this contribution is actually being reported as a 2020 contribution, the reason would be the the contribution was not identified as a SEP contribution. Be sure it shows as a SEP contribution, or it will have to be removed and re contributed as a SEP Contribution. It cannot be recharacterized as a SEP contribution.