Taking back out an overfunding of a SEP

[John of PA]

Client put too much in their SEP during 2017, so they took 10,000 back
> out during 2017. Financial Institution is showing the 10,000 taken back out
> as a code 7 1099-R normal distribution. This is not the way to go about
> it, correct? Thanks.

[ATSMAN]

Client put too much in their SEP during 2017, so they took 10,000 back
> out during 2017. Financial Institution is showing the 10,000 taken back out
> as a code 7 1099-R normal distribution. This is not the way to go about
> it, correct? Thanks.

Did they remove the excess within 6 months and file an amended return by October 15.
If you remove your excess contribution plus earnings by October 15 deadline, the earnings are taxed as ordinary income. If you're under 59½, the 10% pre mature distribution penalty may apply.

So either get a corrected 1099-R or use the 5329 to correct the amount subject to 6% tax and the pre mature distribution penalty.

[John of PA]

Thank you. This all happen in 2017 so they have time to take it back out.

[DonB]

Client put too much in their SEP during 2017, so they took 10,000 back
> out during 2017. Financial Institution is showing the 10,000 taken back out
> as a code 7 1099-R normal distribution. This is not the way to go about
> it, correct? Thanks.

From pub 590-A: This applies to Traditional IRAs and I believe it would apply to a SEP IRA: "How to treat withdrawn contributions. Don’t include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both of the following conditions are met.
No deduction was allowed for the excess contribution.
You withdraw the interest or other income earned on the excess contribution."

I believe the 1099-R is coded incorrectly and should be code 8. Or maybe the client did not tell them this was a withdrawal of excess contributions and they thought this was just a normal distribution. If that is the case discussions with the custodian are in order.

[ATSMAN]

It may be too late to get a corrected 1099-R by deadline!

[Gretel]

It may be too late to get a corrected 1099-R by deadline!

The deadline includes extension - I had a similar issue last year.

[John of PA]

Thank you, I will tell the client to have it changed to code 8.

[geekgirldany]

If at all possible get the code corrected on the 1099-R. I have a client going through this right now. It is just back and forth with the IRS. Of course they did not tell or give me the 1099-R which made matters worse. I posted on a similar situation in the later part of last year.