How to report withdrawal of excess SEP contribution and earnings

[klheilman]

In 2021 I inadvertently contributed more than the allowable amount to my SEP IRA.  I have no self employment income for 2022, so I could not recharacterize the overage to be a 2022 contribution.  After several frustrating calls to my brokerage in early 2022, the excess contribution and gains were removed from the SEP.   This was done prior to my filing deadline, but after my taxes for 2021 were filed.  Due to a huge delay I just received my official Form 5498.  It reflects Box 1 shows the amount of the excess contribution. Box 8 shows the maximum amount that I was able to contribute based on my income. 

Quicken would only let me report the maximum allowable amount for the SEP contribution (the same as is reflected in Box 8), so that's how my taxes were submitted.  How do I report all this to the IRS?  On the 1040 I filed, it appears as if I contributed the maximum amount to my SEP and that's it.  How/when do I account for the gains that were distributed?  Do I need to do anything with the amount that appears in Box 1, the overage that was contributed but removed prior to my filing deadline?

Thanks!

I just received the 5498 and it shows the amount 

[Anonymous_]

What is the TurboTax phone number? (intuit.com)

You might want to contact Support if you cannot get this resolved here.

[dmertz]

Boxes 1 and 8 of the Form 5498 indicate that the brokerage reallocated what would have been an excess SEP contribution to be a regular traditional IRA contribution instead, so your business made no excess SEP contribution.

The funds that you contributed as this regular traditional IRA contribution (the box-1 amount) came from your compensation from the business, not not from funds of the business.   If you are a sole proprietor, it all comes from your net profit from self-employment.  If you are instead an employee of an S or C corp, the amount of the regular contribution should be reflected in your wages in boxes 1, 3 and 5 of your W-2.

Was a distribution paid to you equal to the amount in box 1 plus the gains attributable to the amount in box 1?

[klheilman]

The amount in Box 1 was actually not a traditional IRA contribution.  Those funds were returned to me from the brokerage.  It sounds like I need to contact the brokerage again to have them correct this form.  A distribution was made directly to me which consisted of the the amount in Box 1, plus the gains they calculated.

[dmertz · Accepted solution]

What the brokerage did and reported is fine.  The brokerage adjusted your contributions to be the permissible SEP contribution plus a regular traditional IRA contribution, then made a return of the regular traditional IRA contribution.  The result is that there is no excess SEP contribution.  You'll receive a 2022 Form 1099-R with code P (and code 1 if you are under age 59½), indicating the taxable earnings that are required to be included on your 2021 tax return.  You might as well wait until this form is provided to you in early 2023 before amending your 2021 tax return to include these  taxable earnings.

As I said before, the result is that the amount in box 1 of the Form 5498 is from your compensation, so that either came from your net profit or was required to be included on your W-2, depending on the type of business entity.

Note that a SEP IRA account is permitted to receive regular traditional IRA contributions as was the result of the brokerage's adjustment.  That was followed by a return of that regular traditional IRA contribution, adjusted for gains, with the result being as if the regular contribution was never made.  No regular IRA contribution gets reported on your 2021 tax return, only the taxable gains must be reported on your 2021 tax return.  The gains are subject to ordinary income tax and, if you were under age 59½ at the time of the return of contribution, to a 10% early-distribution penalty.

[dmertz]

Note that what the brokerage did and reported might be the only way they were permitted to make the correction.  SEP contributions might not permitted to be returned, so for the contribution to be returned the can treat that portion as a regular contribution, which they did.

[klheilman]

Brilliant!  That makes sense.  I was just concerned that I had to somehow go back and report the amount in Box 1 to the IRS on the 2021 taxes, and that I would potentially end up paying tax on that Box 1 amount twice.  I was a self employed 1099 contractor, by the way.  Because the correct maximum contribution amount was reported and not what I actually mistakenly over-contributed, I paid taxes on the Box 1 amount in 2021.  As long as only the gains will be reported going forward so I can amend the 2021 taxes, that’s fine.  

[klheilman]

Thank you very much for the clarification.  I sincerely appreciate your help!

[klheilman]

I have received a 1099-R from the broker in 2022 that shows the gross distribution and the taxable amount.  As per your previous instructions (thank you), I opened my 2021 Federal return in TurboTax so that I could file an amendment.  When I select code P in TurboTax, TurboTax reads "P--Return of Contribution Taxable in 2020."  This is not correct.  The 1099-R itself clearly reads that this amount is taxable in 2021 and the Form 1099-R is dated 2022.  Is this going to be a problem??  

[dmertz]

The selection text assume that you are entering a 2021 Form 1099-R, but you are entering a 2022 Form 1099-R where code P means taxable in 2021.  Ignore the discrepancy.