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March 3, 2009

Excess Nondeductible SEP IRA Contribution

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Excess Nondeductible SEP IRA Contribution

QuestionA sole proprietor (unincorporated business owner) made http://retirementdictionary.com/definitions/contribution contributions in excess of the deductible amount for the previous tax year to his http://retirementdictionary.com/definitions/simplifiedemployeepensionsepira SEP IRA. He has no employees (other than himself) and wants to leave the amount in the SEP IRA and apply it to the current tax year. Is that permissible?

Answer

Yes. As provided under http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000404—-000-.html IRC. §404(h)(1)(C), if an employer contributes an amount in excess of the 25% (of “net earnings from self-employment”) deductible limit, the amount is deductible in succeeding tax years. The amount will also be subject to the 25% limit for those years. For this purpose, a SEP IRA is treated as a http://retirementdictionary.com/definitions/qualifiedretirementplan qualified plan –as provided under http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00004972—-000-.html IRC. §4972- and the excess amount is therefore subject to the 10% annual penalty tax on nondeductible excess contribution (Cite http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00004972—-000-.html IRC. §4972(d)(1)(A)(iii)).

The 10% penalty tax must be reported on http://retirementdictionary.com/definitions/5330-irs-form-5330 IRS Form 5330.

Note: The SEP IRA custodian will report the SEP contribution on IRS Form 5498 for the year they received the amount. The carry-forward occurs on the books and records- including tax return- of the employer. No adjustment is done by the SEP IRA custodian.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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