Procedure for correcting 2012 excess SEP/IRA contribution

[Guest Taxlady1040]

Sole proprietor with no employees made improper elective deferral of $17,000 to SEP/IRA on 2012 tax return. Employer contribution OK. Error discovered after October 15, 2013.

Can I get a confirmation that this is the correct way to remedy this?

Amend 2012 tax return and remove excess elective deferral of $17,000 from line 28 of 1040.

Pay 6% excise tax on 2012 Form 5329. Include form and payment with 1040x.

Excess contribution remains in the SEP/IRA account, and there are no reporting requirements on custodian's part to the IRS (other than the 5498 which reflects the total contributions made for 2012, including the excess contribution).

Carry forward $17,000 to 2013 as a deduction, subject to the 25% limit .

Is the 5329 the proper form to report and pay this 6% excise tax?

If the $17,000 is completely applied on the 2013 tax return, does that mean there is no more 6% excise tax required to be paid?

[Lou S.]

If he's a sole proprietor and the contribution was made in 2013, why do you need to remove it? Just call it an employer contribution the question becomes which year.

Is he over the 25% deductible limit in 2012? If no do you really need to do anything? The whole contribution is deducted on the same line of the 1040.

If he's over the deductible limit in 2012, amend the return but since contrib was made in 2013 and not 2012 you don't have an excise tax for 2012.

If you are under deductible limit in 2013 I see no reason to pay an excise tax.

[Guest Taxlady1040]

Yes, was over 25% by $17,000 an improperly taken deferred compensation. The employer contribution was $15,909. He was assuming he had the same deferred compensation limits as a 401k.

Thank you for saving me $1020 in 6% penalties. When I started on the 5329, I realized that there was no 5439 issued for 12-31-2102 because the contribution was not made until April 2013. All I have to do is amend the 1040, remove the $17,000, pay the extra tax, then apply the $17,000 towards 2013's contribution within the 25% limit.

What is interesting to me is that when I called Vanguard to get the $17,000 recharacterized to a 2013 contribution, they refused, said it was too late, the Oct. 14, 2013 deadline passed. They insisted I had to withdraw the $17,000 and pay the 6%

Since the 5498 for 2013 will reflect the entire contribution made in 2013, and does not identify which year, it's a simple matter of,keeping good internal records.

[masteff]

If any of the money was contributed by April 15 2013, and if he's eligible to make a tax-deductible traditional IRA contribution (and didn't do so already), you could treat part of the money as such for 2012 given that it is permitted to make traditional contributions to the same account used for SEP contributions. This would reduce the amount of tax and possible penalty due.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

[Guest Taxlady1040]

The money was contributed April 8, 2013.

Are there any special elections or paperwork to allocate a portion of the excess contribution to a 2012 IRA deduction? does the plan administrator need to do anything as far as the IRA contribution?

[Guest Taxlady1040]

Vanguard refuses to do anything other than send a check for the excess contribution because the October 15, 2013 deadline has passed. They will not recharacterize any portion of the employee contribution to a traditional IRA even though the contribution was made before April 15, 2013.

I am going to just leave the money in the account, amend 2012, and deduct the excess contribution on 2013's tax return. It does not exceed the SEP/IRA limit for 2013.

[masteff]

To quote directly from the IRS page I linked above: "Because a SEP-IRA is a traditional IRA, you may be able to make regular, annual IRA contributions to this IRA, rather than opening a separate IRA account."

The way I see it, you don't need Vanguard to do anything. On the amended return, assuming the client didn't make any other traditional or ROTH IRA contributions for 2012, you simply move part of the money from line 28 to line 32. It avoids tax on $5,000 if the client qualifies for the deduction.