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Excess Nondeductible SEP IRA Contribution

Last Updated March 2, 2011

Question: 

A sole proprietor (unincorporated business owner) made contributions in excess of the deductible amount for the previous tax year to his 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 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 qualified plan –as provided under IRC. §4972- and the excess amount is therefore subject to the 10% annual penalty tax on nondeductible excess contribution (Cite IRC. §4972(d)(1)(A)(iii)).

The 10% penalty tax must be reported on 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.