excess SEP IRA contribution

[emilclu]

Hello, for 2020 I made an excess sep ira contribution.  I'm in the process of asking vanguard to return the contribution which I understand they will do.  However, there are gains associated with this contribution.  Questions: 1) Will vanguard return these gains to me ? 2) And if the gains are returned to me how will they be taxed.  3) And if the gains are returned to me how and when will vanguard report them to IRS. Thank you ML 

[emilclu · Accepted solution]

Hello, As long as the matter is settled prior to April 15 of the tax year following the excess contribution tax year...   Yes, Vanguard will return the gains to you, along with the excess contribution.  Vanguard will send out 1099-R for the gains in the Tax year of the distribution.  Since the distribution will take place in tax year 2021 the tax ramifications will be on your 2021 return.  At that time tubrotax will calculate the tax ramifications.  No need to be concerned with your 2020 tax filing even though the excess contribution took place during the 2020 tax year.  No big deal.

[VMOO]

Hello, 

I am in the process of removing the excess of my 2020 contribution. Should I file the return including the excess amount that I contributed; or should I remove that amount in the return? 

Thank you so much for your help. 

[ThomasM125]

If you remove the contribution before the due date of your tax return, it should not be included on your tax return. When you enter the contribution in TurboTax you be informed that it is an excess contribution and you will be asked if you removed it before the due date of the return. When you indicate that you removed it, it will be removed from your tax return.

[VMOO]

Thank you so much, ThomasM125.

Just to be sure, when is the deadline to remove the excess contribution for SEP-IRA? 4/15 or 5/17? It takes 10 days for the financial institution to process the request. I was told by them the 1099-R for the removal excess will be for the 2021 tax filing.  

Warm Regards. 

[ThomasM125]

Since the due date for your federal return is May 17 this year, you have until that date to remove the excess contribution.

[VMOO]

Thank you so much for your help.
I will file the return before 5/17 after the excess request was processed and removed.

Warm Regards.