Removal of excess contributions with negative earnings

[Guest bmurphy]

I need a refresher on withdrawing excess SEP contributions:

1. What is the deadline for withdrawing the excess without penalty?

2. What is penalty if the excess is withdrawn after deadline?

3. How are "earnings" treated, especially when the value of the SEP account is worth less than the contributions made (negative earnings)?

Thank you.

[Appleby]

The deadline for removing the excess contribution is the tax filing deadline, plus extensions, of the year for which the contribution was made

Excess contribution that are not removed by the deadline, will be assessed a 6% penalty for every year the excess remains in the IRA

For excess with negative earnings, you have two options.

1. treat the earnings as zero and remove only the excess, or

2. deduct the loss from the excess amount and remove only the net amount. The IRS made the second these optional when the issued the notice that permitted the second option

[Regarding iterm 2, see below.]

[Gary Lesser]

The second option referred to above ONLY applies in the case of a Roth-IRA recharacterization. In the case of an IRA or SEP/SARSEP-IRA the loss can only be recognized when ALL of the assets are withdrawn from that IRA and the amount withrawn is less than the unrecovered basis.

[ See my apology below.]

[Appleby]

Gary,

Under the old rules, this would be true. However, this changed for tax years after 1999.

Beginning 2000, the rule that applies to Roth IRAs was made optional for traditional IRAs.

Under IRS Notice 2000-39, the IRS permits the NIA to be a negative amount for IRA excess contributions. The examples used in this notice used to illustrate the new rule (using a negative NIA) show balances remaining in the IRA after the excess has been removed.

The URL to IRS Notice 2000-39 is attached

http://ftp.fedworld.gov/pub/irs-drop/n-00-39.pdf

[Gary Lesser]

Appleby,

You ARE correct. My apologies.