cancel
Showing results for 
Search instead for 
Did you mean: 
Highlighted
Level 1

SEP Mess

I deposited 20k in my SEP on 3/29/2020. A week later, I realized I was over my contribution limit for 2018 and took the 20k back out. Unfortunately, I did not go thru proper procedures with Vanguard and, as such, it was reported as a withdrawal in 2019. I never claimed the 20k deposit on my taxes. I could claim $9,900 of it on my 2019 taxes (not yet filed) and $7650 on my 2018 taxes if I wanted to file an amended return.

Don’t really know how to fix this. Should I just wait to get audited and attempt to explain that to the IRS?

 

Thanks for your help!

6 Replies
Highlighted
Expert Alumni

SEP Mess

If you were over your contribution limit in 2018, you needed to find your contribution limit for 2019 and subtract the 2018 overage from that amount, and that is what you can contribute in 2019 to avoid a penalty for 2019.

 

I assume the $20,000 contribution you made in 2020 was for 2019, and you withdrew those funds and had them apply to 2019, so effectively you did not make a contribution for 2019, as I understand it.

 

So, it seems to me you are OK for 2019. The form 1099-R that you will receive for the distribution should be coded "8" for excess contributions.

 

If I understand everything correctly, then, you would just need to amend the 2018 return to report the excess contributions in that year and pay the penalty that applies to them.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
Highlighted
Level 15

SEP Mess

The excess contribution penalty for a SEP contribution is a 10% penalty reported on Form 5330, a form not supported by TurboTax.

 

However, SEP contributions are reported by the IRA custodian on Form 5498 as being in  a particular year, not for a particular year, and it's the responsibility of the employer, not the custodian, to track the allocation of contributions to particular years.  Since you made the contribution intended for 2018 on March 29, 2019 (obviously not in 2020 as you indicated in your question), you can treat the contribution as a contribution for 2019 instead of as a contribution for 2018 (since it's your responsibility to allocate the contribution to the particular tax year) and, if it's a excess contribution for 2019, you should be able to obtain an explicit return of that contribution to avoid the 10% SEP excess contribution penalty.

 

Regardless of what you do with regard to the excess SEP contribution, that doesn't change the fact that you obtained a regular, taxable distribution from this traditional IRA.

 

The only other possibility, and I don't know if this approach is viable, would be to treat the $20,000 distribution as having be coded incorrectly and that it represents contribution plus attributable gain or loss.  If there was a gain, you would have to do a reverse calculation to determine how much of the distribution was a proportionate gain with respect to the remainder of the distribution.  If there was a loss, you would have to split the distribution between a loss-adjusted amount and the remainder which would still be a regular distribution.

Highlighted
Level 1

SEP Mess

Sorry, I made a mistake. Should have read 3/29/19. I am going to try to shove as much of the 20k back into my 2018 return and then the rest in my 2019 return. I think I will still be about 2k over the limit and I will have to pay the penalty on that.

Highlighted
Level 1

SEP Mess

Looks like I will also have to pay the penalty for early withdrawal of the 20k as well.

Highlighted
Level 1

SEP Mess

Ahh, you noticed my error in the date.

"the only other possibility, and I don't know if this approach is viable, would be to treat the $20,000 distribution as having be coded incorrectly and that it represents contribution plus attributable gain or loss."

 

Any idea on how I would go about  it being coded incorrectly? Wouldn't that be an easy way to get audited?

I talked to Vanguard about something like that and they said they could not help

Highlighted
Level 15

SEP Mess

"Any idea on how I would go about  it being coded incorrectly? Wouldn't that be an easy way to get audited?"

 

A claim that a Form 1099-R is incorrect is done by filing a substitute Form 1099-R (Form 4852) with an explanation and indeed is likely to result in an IRS examiner review the filing since the IRS Automated Underreporter System will almost certainly flag the tax return for examination and it would be up to the examiner to determine whether or not to accept your position.  That's why I indicated that I have no idea if this approach would be viable.  However, the law simply says that a return of contribution before the due date of the tax return be accompanied by any gain or loss attributable to the amount being returned, and it is mathematically possible to determine an allocation that satisfies that requirement and would have resulted in a distribution of the amount actually distributed.  (Unless there was no investment gain or loss while the money was in the account, the amount returned will not be the same as the amount distributed and you would still have some excess contribution if there was a gain or some amount of regular distribution if there was a loss.)