topic Re: SEP excess contribution in Self employed

SEP excess contribution

Pebbles2 — Mon, 02 Mar 2020 17:58:06 GMT

In Dec 2019 I contributed to 2019 SEP. The contribution was $72 excess of the allowable amount, as calculated by TurboTax. It appears I have 2 options: (1) remove the excess. This will generate a 1099-R. Since the CORRECT SEP contribution amount will be on my tax return, it seems the 1099-R will result in taxing the $72 twice. It will be coded as "E" but when I put a mock 1099 in Turbotax with that code, it still generates taxes on the removal. I could override TurboTax to reflect the actual, higher SEP contribution made, but overriding voids Audit protection. Option (2) I can VCP (voluntary correction plan) with the IRS, and the IRS website states that "Alternatively, if a submission is made under the VCP program, the excess amount may be retained in the SEP-IRA, but only if the plan agrees to enter into a closing agreement and pay an additional amount to the IRS via an imposed sanction that is equal to at least 10% of the excess amount, excluding earnings. Note that the additional compliance fee will not apply if the excess amount is under $100. " So it looks like no fee since it's under $100. However the VCP forms look daunting. Any suggestions?

Re: SEP excess contribution

DaveF1006 — Mon, 02 Mar 2020 19:37:04 GMT

in reference to your excess, if you indicate you will remove the excess this year, it will create a 1099R to report in 2020. Box 7 will generate a distribution code that indicates this is a return on a contribution. With this code, that $72 will not be taxable income to you in 2020.

Re: SEP excess contribution

Pebbles2 — Mon, 02 Mar 2020 23:45:30 GMT

Thanks for your reply! Just to be sure I'm understanding correctly: I was told the 1099R would have a distribution code of "E". Do I presume correctly then that Box 1 of the 1099R will show the distribution (excess+earnings), and Box 2, taxable amount, will show only the earnings? With Box 7 showing code E. Thank you!

Re: SEP excess contribution

DaveF1006 — Tue, 03 Mar 2020 19:13:22 GMT

it is my understanding that it will show up as code P-Excess Contributions plus earnings/excess deferrals taxable in 2019 (prior year). Taxable amount should only show the earnings.

Re: SEP excess contribution

Pebbles2 — Tue, 03 Mar 2020 20:00:00 GMT

The brokerage told me code E but I guess we'll see! The correct, after-excess-removed amount is going on the tax return. So as long as the excess removed isn't taxed via the 1099R, all is well. Thanks again for your reply!