SEP-IRA excess contribution previous year: options? Process?

Forum|Forum|6 years ago
July 14, 2020
1 reply
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I had an excess contribution to my SEP-IRA in 2018 ($601). It seems there are 2 options:

1. Have the excess removed (fees and penalties involved)

2. Under-contribute by the same amount in 2019 and pay the 6% penalty

How do I go about either of these processes in TurboTax Self-Employed Online? At one point in the IRA contributions process, it asked me about IRA overpayments, but never followed up on that.

Option 1 sounds like a lot of work and headaches to save $36. I’d prefer to just go with Option 2, pay the penalty and be done with it.

Option 1, I was told, will likely have to happen on my 2021 taxes, and requires a “tax professional” to make sure all the paperwork is filed once Vanguard moves the money to the proper locations. And I’ll likely pay a 10% penalty for the removal of the excess funds from the SEP-IRA. Not to mention an additional year of the IRS 6% penalty.

Hence my desire to just pay the 6% penalty this year, and be done with it.

Is there any downside to Option 2 (Vanguard support referred to it as “absorbing” the excess, but not sure if that is the technical term for it)?

Am I incorrect in any of my understanding about the options available, or the process, or the fees involved?

And how exactly would I go about Option 2 within TurboTax?

TurboTax Self Employed Online

Best answer by dmertz

Oh OK thank you, I just did some research on 5330 and now understand it's a completely separate form to file. I was under the impression it was to be submitted as part of the income tax filings.

So once 5330 is filed and penalties paid, do I need to file an amended 2018 return? And/or do I need to indicate anything the not-yet-filed 2019 return about 5330?

Does filing 5330 allow me to use the "carry forward" approach and assign the excess 2018 contribution as part of the 2019 contributions (which have the room for carrying forward the excess)?

I assume i need to account for the excess somewhere with the IRS in addition to the 5330, or is that not the case?

If you filed using TurboTax, TurboTax would have limited your self-employed retirement deduction to only that which was allowed, so there is nothing to change on you 2018 individual tax return.

Yes, the excess can be applied as part of your 2019 SEP contribution and you can deduct it on your 2019 tax return. See IRS Pub 560 page 7:

https://www.irs.gov/publications/p560#en_US_2019_publink10008842

Nothing else is required. with regard to the IRS (except, perhaps, to provide explanation if the IRS questions the amount reported as your self-employed retirement deduction for 2019). To get TurboTax to include the carryover as part of your self-employed retirement contribution on line 15 of your 2019 Schedule 1, when entering the amount of your SEP contribution for 2019 include the amount of the carryover.

macuser_22

Alumni - Champ

You cannot avoid the 6% 2018 and a 2nd 6% 2019 penalty by removing it in 2020. It is too late for either one. You only had until Dec 31, 2019 to remove the excess to avoid the 2019 penalty. You can avoid another 2020 penalty by either removing the excess before Dec 31, 2020 or applying the excess as a 2020 contribution if withing the contribution limits.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

george_cAuthor

Level 3

OK thank you, good to know on the 2019 penalty. I assumed I had until I filed to avoid the second penalty.

Would it be possible to apply the 2018 excess contribution in the 2019 filing? I have not filed 2019 yet. And my current SEP-IRA contribution is well below the max for 2019, plenty enough to allow for the excess from 2018.

How do I go about applying the excess in either case (2019 or 2020 filing)?

Thank you!

dmertz

Level 15

Actually, the penalty for an excess SEP contribution is 10%, calculated on Form 5330. TurboTax does not support Form 5330.

Most people make their SEP contribution for a particular tax year shortly after the end of the year. Since SEP contributions are reported as to the year in which they are made instead of the year for which they are made, If your made the SEP contribution for 2018 in 2019 you can just treat that contribution as a combination of your maximum permissible SEP contribution for 2018 plus part of your SEP contribution for 2019 and none of it will be an excess contribution. However, if you made an excess contribution for 2018 in 2018, you are subject to the 10% penalty on the excess.