Question

SEP excess contribution

Forum|Forum|6 years ago
March 2, 2020
1 reply
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In Dec 2019 I contributed to 2019 SEP. The contribution was $72 excess of the allowable amount, as calculated by TurboTax. It appears I have 2 options: (1) remove the excess. This will generate a 1099-R. Since the CORRECT SEP contribution amount will be on my tax return, it seems the 1099-R will result in taxing the $72 twice. It will be coded as "E" but when I put a mock 1099 in Turbotax with that code, it still generates taxes on the removal. I could override TurboTax to reflect the actual, higher SEP contribution made, but overriding voids Audit protection. Option (2) I can VCP (voluntary correction plan) with the IRS, and the IRS website states that "Alternatively, if a submission is made under the VCP program, the excess amount may be retained in the SEP-IRA, but only if the plan agrees to enter into a closing agreement and pay an additional amount to the IRS via an imposed sanction that is equal to at least 10% of the excess amount, excluding earnings. Note that the additional compliance fee will not apply if the excess amount is under $100. " So it looks like no fee since it's under $100. However the VCP forms look daunting. Any suggestions?

DaveF1006

in reference to your excess, if you indicate you will remove the excess this year, it will create a 1099R to report in 2020. Box 7 will generate a distribution code that indicates this is a return on a contribution. With this code, that $72 will not be taxable income to you in 2020.

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P

Pebbles2Author

Thanks for your reply! Just to be sure I'm understanding correctly: I was told the 1099R would have a distribution code of "E". Do I presume correctly then that Box 1 of the 1099R will show the distribution (excess+earnings), and Box 2, taxable amount, will show only the earnings? With Box 7 showing code E. Thank you!

DaveF1006

it is my understanding that it will show up as code P-Excess Contributions plus earnings/excess deferrals taxable in 2019 (prior year). Taxable amount should only show the earnings.

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