Excess SEP Contribution

[RLymanC]

Need help on how and where to report execess contribution, and how to generate the penalty?

[Matt Sova]

Corp or Personal?

If it is personal and it is for the owner of the business then 5329. However, when was the contribution made? Could it possibly straddle a couple of years since you can make contributions until 4/15/06 for 2005 and actually reclass the 06 contributions made to be taken in 06?

Also, is it excess because they put in > 20% of the SE Income? I guess my question is did they deduct 10% and put in 20%? If so you could amend.

Just trying to cover all the angles. If it is an overcontribution with no remedy, make sure they take out the excess as well as earnings.

[RLymanC]

Matt

As I understand it the taxpayer quessed at her personal self employment profits and contributed what she thought would be allowed, $1500.00 on her 2004 tax return.

As it turned out only $103.00 was allowable based on her net profit of$ 553 less SE 0f $39
times 20%=$103.00.

[Matt Sova]

When

When did she make that deposit? During 2004 or between Jan and Apr 2005? If in 2005 she could reclass it to a 2005 SEP deposit.

[Bees Knees]

The procedures for excess contributions on Form 5329 only applies to Traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, and HSAs. Form 5329 cannot be used for SEP-IRAs.

Any contribution to a SEP-IRA in excess of the allowable amount may be carried over and deducted by the employer in succeeding taxable years, subject to the deduction limits for the carryover year [Section 404(h)(1)(C)]

However, if you leave the excess contribution in the account and carry it over to the following year, the excess is subject to current income to the participant (cannot be taken as a deduction on the 1040 in the case of the self-employed individual) and is also subject to a 10% penalty (not 6% as is the case with a traditional IRA) each year it remains in the account as an excess contribution [Section 4979(a)].

The 10% excess penalty is reported on Form 5330.

[Matt Sova]

Thank you

Bees:

Thanks for the correction. See guys contrary to my belief, I do not know everything.

Matt