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Excess SEP contributions


Guest ColinBellEA
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Guest ColinBellEA

I have a client who was widowed in late 2003 and has not yet filed his tax returns for either 2004 or 2005. In 2004 his employer contributed $30K (F in box 12-a of W-2) on $73K of wages, exceeding the 25% contribution allowance. In addition, the taxpayer contributed $19K to a SEP in 2004 despite having no self-employment income unless you can count the following: he inherited a $93K tax-sheltered annuity from his late wife and his financial advisor had no suggestions other than to cash it (which he did).

I see nothing that I can do except to advise him to take out all of these contributions except 25% of $73K and pay the excise tax. Any suggestions? Any possible way that his situation might be helped by the fact that he has yet to file his 2004 return? If the $19K turns out to have been contributed in 2005 for 2004 can it be attributed to 2005 (a year in which he has lots of self-employment income)?

Thanks.

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If the $19K turns out to have been contributed in 2005 for 2004 can it be attributed to 2005 (a year in which he has lots of self-employment income)?

Sure. The employer should also issue a contribution notice each year (starting with 2005 :P ). Reporting of SEP contributions by employers to IRS only include those made during the year. Thus, contributions made in 2005 for 2004 are just reported as 2005 contributions.

Otherwise, yes -- a removal and penalty for 2004. For 2005, the excess can be corrected by removing it before the tax-filing deadline. Gain is not required to be distributed in a correcting distribution made after the (2004) due date. Hope this helps. The excess is treated as a traditional IRA contribution. So, the actual excess amount could be less than the actual 25 percent overage. In this case, there may also be a 10 percent nondeductible penalty tax for the 2004 SEP contribution the individual made as a SEI. [His employer may or may not have also exceeded its deductible limit.] Hope this helps.

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