My wife has a SEP and she is the only participant. We have estimated that we made a small excess contributuion to the SEP in 2006 for 2006. My wife also has an IRA that we have not been contributing to since we established the SEP. I would like to have my financial institution correct the excess contribution prior to April 17th by moving to excess contributions to the IRA. I believe this corrects the issue as an employer. As an employee I believe we also have to withdraw the earnings on the excess contributions. I understand I need to report these earnings as income, or I can potentially redirect to the IRA. But since my wife has the SEP and our AGI exceeds the $85k deduction limit (the lower deduction limt as my wife has a SEP), this amount will not be deductible. So my questions are:
- If I just report the earnings as income, how eactly do I do that? and
- If I roll over the earnings to the IRA and it's not deductible, what are the consequences? Does this then become a Roth type contribution? Or do I just not take the deduction on this piece? Does this amount need to stay segregated in my IRA? Any penalties to pay or tax forms to complete? Thanks