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SEP IRA Excess Contributions


Guest bill280

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Guest bill280

I'm retired. After retiring, I earned income that the IRS says must be treated as self employment income. I completed Schedule SE and determined my max contribution every year, always less than $1,000. I deposited the money into an old IRA. When I passed age 701/2 I kept depositing the annual SEP contribution, but I did start my RMDs for the IRA. The IRA Holder recently notified me of the excess contributions for 2010, 2011, 2012, and 2013. I have pulled out the contributions plus their associated earnings. What IRS form do I now use to report this action and pay the penalties. Do I submit a 1040X for each year? Are the associated earnings reported on that 1040X or in my 1040 for 2014? How do I use the Form 5329, since the penalties repeat each year until the excess contributions are withdrawn?

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Were they IRA contributions or SEP contributions?

While you can't make pure IRA contributions after age 70 1/2 I'm pretty sure you can continue to make SEP contributions after age 70 1/2 or else you'd run into some ADEA violations so I'm not sure you really have excess contributions for the years in question.

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I'm guessing that when you say you put this into "an old IRA" that you mean it was not a SEP-IRA, is that right? Did you ever sign a SEP-IRA adoption agreement? If so, you might be able to convince the IRA custodian that they really were SEP contributions and were ok...but the money is out already, mmm. Sounds like a mess for less than $1000/year.

Sorry but I'm not really sure about the reporting. I'd want to know for sure how the custodian is reporting the disbursements.

Ed Snyder

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Guest bill280

I made the mistake of never telling the IRA custodian that I was now treating the old IRA as a SEP IRA. When I finally informed them of that situation, they said that they couldn't retroactively convert the IRA to a SEP IRA. As a result, my contributions for tax years 2009, 2010, 2011, 2012 and 2013, while valid SEP IRA contribution amounts, were not put into a SEP IRA. It is now too late to put them into a SEP IRA, so I have the money in hand (contributions and earnings) and owe the IRS appropriate taxes and penalties. My Fed tax returns for those years are now in error because I deducted a SEP contribution that it now turns out was not actually put into a SEP IRA, so I have more taxable income each of those years. Then I have a penalty for putting that money into an IRA that was not supposed to receive any more contributions because of my age. Lastly, I have earnings for each of those contributions, and I know those values exactly.

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I think you wind up with double taxation because the excess contributions weren't taken out before April 1 (or 15?) of the year following, so yes, I think you have to file amended returns and then the custodian will just issue a 1099-R for the distributions and you pay ordinary tax on that.

Ed Snyder

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Guest bill280

Bird, the amended returns for each year address the additional income for that year. How is the penalty for late payment for that year determined and assessed (does the Form 1040X include that)? How is the penalty for that first excess IRA contribution then determined ( the 6% per year that the excess contribution remained in the IRA penalty)? Is that what Form 5329 is used for? All of the money was taken out of the IRA this tax year, so do I report the whole amount as income or only the accumulated earnings, since the individual excess contributions were addressed in the amended returns?

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I'm not that familiar with this end of things, but here are my best guesses:

yes, I think the late payment is address on the 1040X,

yes, I think the 5329 is for the excess contribution and I think the instructions will take you through each agonizing step to determine the penalties,

I believe you will have to pick up all of the income this year; that's what I was saying about double taxation - you lost the deduction and still have to pay the tax when the money comes out. I am quite sure the investment company will issue you a 1099-R with Code 7, which is for a "regular" distribution. You might want to give them a call to try to confirm...good luck with that.

Ed Snyder

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Guest bill280

Bird, I did the Form 5329s for each year. Following their instructions and recording the RMDs that I did take each year because I was over age 70 1/2, (and which were larger than the excess contributions each year), all I have is a 6% penalty on the specific contribution for each year. That penalty is an "Additional Tax" normally reported on line 58 of a Form 1040 that goes as an "Other Tax" entry on the 1040X for each year.

The 1040X for each year also has an increased AGI by the amount of the contribution. That AGI change then decreases my medical deduction. Both of these changes adversely affect the taxable income, resulting in my owing extra taxes for each year 2009 through 2013. There is no penalty or interest computation on the Form 1040X. It just says that the IRS will charge interest and penalties. So I guess that I just file each 1040X with appropriate payments and wait for the IRS to bill me for penalties and interest.

Usually people file 1040Xs to get more money back from the IRS. I don't know if people often file 1040Xs in situations like mine.

Since I took all of the excess contributions plus earnings out of the IRA this year, and that amount is much more than needed to meet my RMD for 2014, do I still need to take a specific RMD to avoid being penalized for failing to take an RMD?

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Since I took all of the excess contributions plus earnings out of the IRA this year, and that amount is much more than needed to meet my RMD for 2014, do I still need to take a specific RMD to avoid being penalized for failing to take an RMD?

I'm not 100% sure but I don't think so.

Ed Snyder

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