IRA contribution made to a SEP IRA
I have a situation where a taxpayer made a traditional IRA contribution to a SEP IRA that he set up in a prior year when he had self employment income. In the year of the contribution, he had no self employment income as he was a salaried employee. The SEP has nothing to do with his current employer. He did not participate in any plans with his employer. I initially told him the contribution to the SEP needed to be moved to a traditional IRA account but this was not done. The IRS has now disallowed the IRA contribution. I thought the IRS was correct but now I am not sure. A spousal contribution was also made to the SEP but this was withdrawn. I think the spousal contribution was withdrawn after the due date. This was for the year 2019 so the due date was 7/15/20. Apparently the custodian prepared a form 5498 for the SEP and reflected a contribution of 14,000.
Permalink Submitted by Alan - IRA critic on Thu, 2021-11-18 19:58
The 5498 has boxes to denote either TIRA contributions (Box 1) or SEP contribution (Box 8). Both can be made to a SEP IRA, but the custodian must be told which type of contribution is intended in order to have the 5498 reflect that. Evidently box 8 was checked, creating a SEP excess “non deductible contribution” per Sec 4972. Assuming that there has been no SE income since 2018, the carryover option to a later year is off the table. The excise tax for this excess contribution is 10%, not 6%, and reported on Form 5330 (Sch A) for each year the excess remains in the account. If the spousal contribution was removed prior to the extended due date with applicable earnings (separate 1099R), that leaves a 7000 excess non deductible contribution with an excise tax of 700 per year, plus a possible late interest billing from the IRS.
The 7000 remaining excess should be distributed prior to year end to avoid another excise tax for 2021. The SEP custodian should be told that the 7000 distribution plus earnings is for an excess SEP contribution. The 1099R should be coded E with no taxable amount in Box 2a, even though earnings are also distributed. See p 45 (5) of the following link to Rev Proc 2019-19:
rp-19-19.pdf (irs.gov)