Can I avoid amending my 2016 return next year (due to an excess SEP-IRA contribution) by withdrawing the excess contributions & earning before filing my 2016 taxes? How?

[dmdmd4]

I made an excess contribution in 2016 to my SEP IRA.
I received a Form 5498 reflecting that amount.
I withdrew the excess contribution and excess earnings in Feb 2017.
I am under age 59.5 and I am not disabled.
I have not yet filed my 2016 taxes.
I want to file my taxes in such a way to avoid having to amend my return next year.

[DDollar · Accepted solution]

If you withdrew the excess contribution, plus any income associated with the excess before you file your taxes, it's as if you never made the contribution.  You will not have to file an Amended return.  The Form 5498 is an informational form, but you do not use it to file.  The IRA custodian will report the withdrawal on the 5498 that will be filed later this year.

[fanfare]

Not quite. Any earnings on excess must be reported as ordinary income in 2016. If you don't , you'll end up having to amend later when you get the 1099-R from the custodian showing taxable earnings.
If your money was sitting and earned nothing, then there is nothing to report.
Put the excess earnings on Line 15B.

[DDollar]

Thanks to fanfare!  In my haste I forgot to include that part.

[shazia-f-mehmood]

Hello I am in the exact same position except for tax year 2017. I did withdraw the excess contribution via Vanguard prior to filing my taxes as recommended. I had excess earnings of only $46. I asked Vanguard to withhold 10% federal tax on this amount. How do I report these earnings? I am using TurboTax Home and Business; the SEP IRA is showing up under business, but I don't see a place to report excess earnings.

[dmdmd4]

Hi - I am the original guy who started this thread.  I just filed my 2017 taxes, and it prompted me to report the excess earnings, then told me to amend my 2016 taxes.  I was trying to avoid this when I realized my excess contribution last year.  Anyway, I filed the amendment and it was no big deal.  Essentially I had to report the interest income of the excessive contribution as income.  

So I'm not any kind of tax expert, but it works for me and was easy.  I would just move forward, file your 2017 taxes, and when you file next year, expect to have to amend your 2017 return.  I did it with last years Turbo tax program and it was actually very easy.

[BobinDC]

IRS Pub states that you can carry any excess SEP contribution to the following tax year but it cannot exceed the contribution limit for the later year.  I think (but am not sure) if  you can withdraw the amount that exceeds the later year limit before the filing due date for that later year you will only pay tax on the amount of income the excess earned as income in later year.  

Example:  contributed $5000 to SEP in March 2017 for tax year 2016 and erroneously contributed $5000 again in Oct 2017.  You can claim the second contribution was for 2017.  However, your contribution limit for tax year 2017 is only $4000.  Your custodian  must withdraw the $4000 plus earned interest of $400 by April 15 2018 (or Oct 15, 2018 if you filed for an extension).  The earned interest is taxable income in year 2017 and must be included on the return for that year or on an amended return for 2017.

If I am wrong please correct me.