Excess SEP Contribution

[RLymanC]

Having trouble on how to report an excess contribution to a SEP.

In November of 2004 my self-employed client deposited $1500 into her SEP account.
No deduction was taken on the 2004 return as she had no profit.

I filled out Part III line 15 on form 5329 fot tax year 2004 and sent that form in with the penalty payment.

I suspect she has to withdraw the excess deposit and will be issued a 1099-R with a code D. There is no earnings on the $1500.00. My question is:
Is this withdrawal taxable along with 10% penalty?

In my way of thinking this withdrawal should not be taxable as it was never deducible.

[Brian EA]

Since she did not take a deduction it would not be taxable. Let's hope she made the withdrawal otherwise there is another penalty

[geekgirldany]

From what I read in TTB since there was no deduction it is not taxable. But if she did not take it out a penalty would be calculated again. I think she could have taken it out before the due date of the return and it would not be penalized.

[Bees Knees]

This same issue came up a week or so ago.

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.