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george_c
Level 3

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

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?

1 Best answer

Accepted Solutions
dmertz
Level 15

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

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.

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13 Replies
macuser_22
Level 15

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

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_c
Level 3

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

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

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

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.

george_c
Level 3

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

Thank you @dmertz 


My 2018 contributions were all in 2018. My net income was lower than anticipated and I thought I was being wise investing throughout the year. 

Good to know I can’t do this with TurboTax. But that’s a huge monkey wrench now. 

If as was suggested earlier, my window to avoid 2019 penalty interest has passed anyways, does it just make sense to file 2019 as-is, then deal with this for the 2020 return? 

And assuming I just deal with this in the return for 2020, can I still use Turbo Tax, then file the 5330 form separately (or perhaps later as an amended return)? Or does that form requirement eliminate my ability to use TurboTax completely for 2020? 

Thanks again!

dmertz
Level 15

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

This requires filing a 2018 Form 5330 and must be filed separately.  The excess contribution is reported on Schedule A of Form 5330.  At this late date, I think there is a late filing penalty (in this case, it appears that there is a $60 late-filing penalty in addition to the $60 excess contribution penalty on the $601 nondeductible (excess) SEP contribution), but let the IRS bill for any late-filing penalty.

george_c
Level 3

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

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?

dmertz
Level 15

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

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.

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george_c
Level 3

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

Wow, thank you so much for your help. I cannot express enough gratitude. My head is much less muddled now. 

 

I see what you are saying about the deduction vs contributions in 2018 — I may have contributed an excess, but I only *claimed* the max and therefore my deductions are in order. Whew! 

 

Great to hear on adding the excess contribution to 2019. 

 

And @dmertz — if you are hire-able for filling out the 5330, I need to hire someone to do this and if possible would be great to repay your generosity beyond just a thank you with paid work. 

 

I've looked over that form and I am concerned I'd fill it out incorrectly without some guidance. Please let me know. Thanks again!!

dmertz
Level 15

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

Regarding Form 5330, I can only refer you to the form and its instructinos:

https://www.irs.gov/pub/irs-pdf/f5330.pdf

https://www.irs.gov/pub/irs-pdf/i5330.pdf

 

Also, I just noticed that Form 5330 is one that does not change every year, so there is no Form 5330 specific to 2018.  However, you would be filing it for the tax year beginning on January 1, 2018 and ending on December 31, 2018.

george_c
Level 3

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

Thanks again @dmertz 

 

For anyone out there with the same issue, it wasn’t clear to me at first, but as was pointed out TurboTax will not allow you to claim more than the maximum SEP calculation on your return, so if you had an overpayment and want to carry it forward, you still need to claim the max SEP deduction in the “catch-up” year’s filing, but only reduce your contribution by the previous year’s excess amount. 

if you were to reduce your SEP deduction by the excess on your current return, then you’d still have that excess contribution. You file your return as taking the max SEP contribution (and as if you’ve contributed all of it), but you’ve already partially contributed to it “early” via the previous year’s excess payment. 

The only place to reduce amounts by the excess is in the amount contributed to the SEP for the current year. 

Tell TurboTax that you contributed the max to the SEP, but when contributing to the SEP, the total should be the max minus the excess from the previous year. 

I hope that makes sense! 

But it wasn’t obvious to me at first, so wanted to share that here for anyone else who needs this info. 

tmestro
Returning Member

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

I made an excess contribution to my SEP IRA in April 2021 for tax year 2020.  Can I use the excess as my 2021 contribution?

dmertz
Level 15

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

The SEP IRA custodian only records and reports the year in which a SEP contribution is made, not the year for which the contribution was made.  It's up to you to allocate SEP contributions made between January 1, 2021 and the due date of your 2020 tax return to either 2020 or 2021.  Still, you would probably want to make sure that whatever portion of the April 2021 SEP contribution you allocate to 2021 is supported by your 2021 earnings up through the date of the contribution.

tmestro
Returning Member

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

Thank you so much.  You have been a great help.  

 

 

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