I am 71 and employed - in 2016 I contributed $6,200 to my SEP IRA. TurboTax is telling me I must pay a penalty of 6% - is this correct? What can I do to avoid the penalty

 
dmertz
Level 15

Retirement tax questions

Was this a SEP-plan contribution based on earnings from self-employment?  If so, you've entered it in the wrong section of TurboTax.

If this was instead a regular personal traditional IRA contribution, your age makes you ineligible to make a traditional IRA contribution for 2016 and beyond.  Any personal traditional IRA contribution that you make is therefore an excess contribution subject to penalty every year that the excess remains unresolved.  If your modified AGI permits, you can ask the IRA custodian to recharacterize the contribution to be a Roth IRA contribution instead.  Otherwise, to avoid penalties you'll want to ask the IRA custodian to make a return of excess contribution before the due date of your tax return.

Retirement tax questions

Yes, it was a SEP IRA plan based on my earnings - but I am not self-employed. My employer puts a certain amount into the SEP IRA once a month and I add to it but it all comes out of a check from my employer.
dmertz
Level 15

Retirement tax questions

The only type of SEP plan that allows employee contributions is a SARSEP plan established before 1997.  If this is the case, your contributions are reported with code F in box 12 of your W-2.  Is that what you have?  If so, report this only on TurboTax's W-2 form, nowhere else in TurboTax, particularly not under Deductions & Credits.

Another possibility is that this is actually a SIMPLE IRA plan (not a SEP plan) with your contributions reported with code S in box 12 of your W-2.  Similarly, report this only on TurboTax's W-2 form, nowhere else in TurboTax.

Some custodians permit regular personal IRA contributions to be made to a SEP-IRA account.  Doing so through your employer is referred to as a Payroll Deduction Contribution and would be reportable by you on your tax return as you would any personal traditional IRA contribution that you make yourself.  The payroll deduction is simply for your convenience, it is not an employer plan contribution.  As such, it would be an excess contribution for 2016 because you reached age 70½ in 2016 or 2015.

Retirement tax questions

Thanks for your help. There's a Code D in Box 12 of my W-2 for Deferred compensation. Does this help?
dmertz
Level 15

Retirement tax questions

Code D indicates that the contributions through your employer are elective deferrals to a 401(k) plan (or the federal TSP plan).  It is not a SEP-IRA or any other kind of IRA.

Enter the code D amount only in box 12 of TurboTax's W-2 form, nowhere else in TurboTax.  Go back and remove the entry that you made under Deductions & Credits -> Retirement and Investments -> Traditional and Roth IRA Contributions.

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