SEP IRA OWNER DECEASED AND LIKELY MADE EXCESS CONTRIBUTIONS
I am trying to figure out how the Spouse beneficiary would be able to remove what are likely to be excess SEP IRA contributions from her deceased spouse. He passed away in January 2022 and made $26000 of contributions for the 2021 year. She informed me the company is likely to incur a loss. She took over company at the time of his passing. Custodian informed me she cannot remove the excess contributions from His SEP IRA account. i amd the RIA and also complete the tax returns for the client. the custodian told me to find out from a tax advisor how this can be done. It is unlikely that any CPA will know the answer to this questions off the top of their head as it is something that is not an everyday transaction.
I opened up a beneficiary IRA for the spouse. I was wondering IF I should also open a traditional IRA in her name. She wants to withdraw the excess contributions.
would I be able to hold the excess contribiutions plus earnings for the 2021 year on the excess contributions into the beneficary IRA and roll the remaining into the Spouses traditional IRA?
Also how would I account for the excess contributions on the tax return?
Thank You
Robert Everett
Permalink Submitted by William Tuttle on Mon, 2022-03-14 22:42
You are correct that the majority of CPAs lack the knowledge and experience to deal with employer retirement plan errors. Let alone one in conjunction with the death of a plan sponsor principal.
There are both the employer SEP IRA plan excess contribution issue and the inherited SEP IRA account issue. These are separate issues and the former should be dealth with first.
I recommend that absolutely nothing be done with the SEP IRA until the excess contributions and earnings are removed from the SEP IRA. The spouse has until 12/31 of the year following the year of death to rollover to an inherited traditional IRA, rollover to an owned traditional IRA, take ownership or do nothing and default to ownership. This gives the maximum time to remove the excess contributions and earnings.
I recommend the business sponsoring the SEP IRA file a tax return extension whether filing on time or not. This gives the maximum time to correct the excess contributions. No deduction for the excess SEP IRA contributions should be claimed.
An excess SEP IRA and earnings must be removed by the employer and returned to that by the tax filing deadline including extensions.
The SEP IRA would be in non-compliance with the tax code and IRS regulations by not allowing the employer to remove the excess contributions and earnings.
I suggest the SEP IRA custodian be recontacted by the employer even if it was a sole proprietorship with the decedent as sole proprietor. The sole proprietor is both employer and employee It is now a sole proprietorship with the wife as sole proprietor. It needs to be pointed out the request to remove excess contributions and earnings are coming from the employer and they must comply.
Refer them to the IRS SEP Plan Fix-It Guide – Contributions to the SEP-IRA exceeded the maximum legal limits
https://www.irs.gov/retirement-plans/sep-fix-it-guide-contributions-to-the-sep-ira-exceeded-the-maximum-legal-limits
Once the excess contributions and earnings are removed then you can come back and ask for advice on how to deal with the inheritance of the SEP IRA account.