SEP IRA Contributions

[tapinputt]

In June 2020, I left employment as a statutory employee, where I made some income as W2 wages and some as 1099 income (I was a financial advisor/career agent for a mutual life insurance company).  Up until that time, I had access to a 401k, where I made contributions.  When I left, I became 100% self-employed, with no access to a 401k.  I made $6,000 in SEP IRA contributions for the rest of 2020. 

When I input this into Turbotax, it's saying my contribution is not deductible because my MAGI was too high.  It seems to be treating the contribution as if it's going into a traditional IRA, not a SEP IRA.  Is there a workaround to this, as I'm also planning to make some additional SEP IRA contributions this month that would also go towards 2020.  Thanks for your guidance.

[dmertz · Accepted solution]

Do not enter SEP contributions under Deductions & Credits.  Remove the entry you made there.  Enter SEP contributions under income under Business Items -> Business Deductions and Credits -> Self-employed retirement plans.

[Onefish]

I followed this exact path but TT shows a deduction for the full amount of my Sch C taxable income. It does not limit the deduction to 25%.  I'm using the TT  2020 desktop Deluxe version.

[dmertz]

Onefish, I would suggest deleting the Keogh, SEP and SIMPLE Contribution Worksheet to remove all of your previous entries regarding this contribution and revisiting the self-employed retirement contribution section.  It seems that you could have previously made an extraneous entry there.

[Onefish]

Thanks for that, dmertz. I hadn't know where to find the Keough/SEP worksheet (it's in the group of documents right after 1099s in Forms).

Anyway, what the sheet shows now is that all of the net profit is being allowed due to the "catch up" provision. It plugs a figure in—$19,500—that it labels "Allowable catch-up contributions." And apparently since the net profit of the business is less than that amount, it allows the whole net profit to be deducted (as long of course as it is all contributed to the 401(k). by April 15).

Instructions indicate this is only possible at age 65.
 In principle at least I don't think this is anything new. Years ago in another life, I recall helping some older professors use catch up provisions to reduce their taxes by contributing more to their retirement funds.

That was then and this is now, though. Did something change from last year to this year? Because last year, TT kept me to the 25% limit.

[dmertz]

Onefish, as I suspected you somehow mistakenly marked the Maximize box for an individual 401(k), perhaps in addition to marking the Maximize box for a SEP-IRA contribution.

In the online version you can delete a form by clicking Tax Tools -> Tools -> Delete a form, then clicking the Delete link next to the form (in this case, "Keogh/SEP Wks").

You can also just revisit the Self-employed retirement contributions section, indicate that you made a contribution to an individual or Roth 401(k), then on the next page explicitly remove the entries there.

[Onefish]

Good catch,  dmertz. Thanks for spotting that.

When something looks to good to be true.....

[Woodie1225]

SEP IRA Contributions from an S-Corp. We are an S-Corp. We want to make contributions to me the owner, and my employees. Do I report this expense on the K-1 under "Other Deductions" using the TurboTax Business desktop? I want to clarify the money to make the contribution will be coming from my personal account. 

[GeorgeM777]

You enter your SEP-IRA contributions in TurboTax Business by following these steps:

1. In Federal Taxes, click on Deductions.
2. Scroll down the page to Retirement plan contributions
3. Click on Start and then respond to the questions accordingly.

As a way of background, as an employee you do not make contributions to a SEP IRA, the business does so on your behalf.  It is a tax deduction to the business which is essentially a tax deduction for the owner of the business. The business can contribute 20% of business income (for sole proprietors, single-member LLCs and partnerships) or 25% of your salary (for corporations such as S Corps). Unlike traditional IRAs, there is no catch-up provisions since the business is making the contribution.

For SEP-IRAs there is the requirement that all eligible employees must have a pro-rata employer contribution.  For example, if you make $50,000 and your assistant makes $20,000, if the business contributes 10% on your behalf it must do the same for your assistant.

@Woodie1225

[Woodie1225]

Hi George M777,

Thank you so much for your answer/post! I did find where to enter the contribution amount in TurboTax Business. Do you know if it's ok to make the contribution with my own funds? We closed the company last year and all the business bank accounts have been closed.

[dmertz]

SEP contributions are employer contributions.  The S corp must make the contributions.

[Tax_Dale]

A statuatory employee is not Self Employed, eventhough a statuatory employee can deduct expenses related to their income.  Could that be part of the issue? When you say 100% self-employed do you mean you had a Schedule C for Self Employed income? Or for Statuatory income? Statuatory Income and Expense on a Schedule C is not Self Employed income.