Excess deferral
Definition Salary deferral contributions, contributions are limited to the lesser of the IRC § 402(g) limit or 100% of compensation. Salary deferral contributions in excess
March 3, 2009
Excess Nondeductible SEP IRA Contribution
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Excess Nondeductible SEP IRA Contribution
Question
A sole proprietor (unincorporated business owner) made https://retirementdictionary.live-website.com/definitions/contribution contributions in excess of the deductible amount for the previous tax year to his https://retirementdictionary.live-website.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 https://retirementdictionary.live-website.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 https://retirementdictionary.live-website.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.
