SEP IRA Deduction disallowed

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If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Excise tax. If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4.

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This narrative needs some fleshing out if you want a useful answer.

What tax year? Why was the deduction disallowed? Did the IRS assess a penalty for excess contributions? Are you eligible to make SEP contributions for 2011? 2012? Have you made 2011 or 2012 SEP contributions? Do you have earned income for the tax years from the year in question through 2011? Did you make traditional or Roth IRA contributions for the same years?

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Phil makes a very good point - we need to know WHY the IRS disallowed the SEP contribution before we can tell you what your options might be to fix it.

Gene E. Utterback, EA, ABA, RFC

The year was 2009 The disallowance was based on the fact that there was a pension plan from a part time job. Not sure if there was a penalty in the amount due Yes, I am qualified for SEP IRA contribution in 2011 and the small part time job is longer an issue since it ended It was a traditional SEP IRA.

In answer to the penalty part of your question, IF any penalty related to the contribution applies, it's too late to avoid it. That deadline was 10/15/2010.

That doesn't make any sense. You can be covered by a pension plan at one job and still make SEP contributions based on self-employment income. What was your basis for the SEP contribution? How much was it, both $$ and as a percentage of net income from the ativity?

You need to dig up the paperwork and find out.

What about other IRA contributions? Even if you're covered by pension plans at all your jobs you can still make a traditional or Roth IRA contribution.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Can an excess SEP IRA contribution be regarded as applying to the 2010 tax year, for which the SEP IRA is due by 10/15/2011?

In 2009 max SEP contribution was 49k. So maybe if you put 10k into a pension plan, then maybe the SEP maximum is reduced to 39k? Anyway, I'm not sure what it means to put money into a pension plan.

Look if the 10% penalty for excess contributions, plus interest on the penalty, is applied.

Roth IRA contribution depends on maximum AGI.

I'm still with Phil on this one, with one possible deviation. When someone participates in MULTIPLE retirement programs from multiple employers I BELIEVE that the contribution limits are tied to the lowest limit. For example, while you may be able to put up to $49K into a SEP IRA, providing you had sufficient net income from self employment, if you also participated in a SIMPLE IRA at your part time job your COMBINED contributions to both the SEP & SIMPLE would stop at $10K since that is the limit for a SIMPLE (adjusted for the Geezer Pleezer Catch-Up Provision).

Also, since this was for 09 the penalty for the over contribution would still apply for 09. If you were still unable to make a contribution for 2010 you would also be subject to the penalty for that year as well. Keep in mind that the penalty for over contribution to a plan continues until you correct the issue. If you correct it in 2011 by being able to make a SEP contribution then it could be counted as a 2011 contribution and the penalty should not apply.

The best thing you can do at this point, since we'd need a TON of income to actually walk you though what you need to do, would be to find a local Enrolled Agent to help you unravel this. You can go to

Good luck, Gene E. Utterback, EA, RFC, ABA

Each plan has its own limit and there is a combined limit. If you are an employee with salary deferral to a SIMPLE IRA, the limit in 2011 was $11,500. If you had SE income and could contribute the maximum, the limit was $49,000 in 2011 for the SEP. However, any amount contributed to the SIMPLE reduces the amount you can contribute to the SEP. E.g., you put $10K in the SIMPLE. The SEP is now limited to $39K.

Are you sure about that? There are two limits in play, plan and salary deferral. The first is by plan, the second by individual. If I'm an employee who contributes the maximum allowed to a 401(k) salary deferral and I also operate a side business as a sole prop, I can still contribute the SEP limit based on net earnings from self- employment. I could not do a 401(k) or SIMPLE salary deferral from the side job since I've reached the personal limit for deferrals. Plus, assuming I'm under 70 1/2, I can make some sort of IRA contribution of at least $5,000, assuming there's enough taxable compensation left. My references are Pubs 525, 560 and 590.

I'm with Gene regarding the OP, who really needs to sit down with someone and go over a lot of numbers I wouldn't feel comfortable posting in this forum.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Sec. 415(c) sets the overall limit for defined contribution plans (DCP). In Oct. 2011, the IRS released the 2012 limits. The overall limit for defined contribution plans for 2012 is $50,000. Sec. 414 has the definition for defined contribution plans. A SIMPLE IRA and SEP-IRA meet that definition. Sec. 408(p) has the SIMPLE limit. It remains unchanged for 2012. So... your overall limit for DCPs is $50K. Your limit for a SIMPLE is $11,500. If you contribute $10,000 to your SIMPLE, your overall limit of $50K doesn't change... so your SEP-IRA maximum can not exceed $40K.

True if you're talking about only one plan sponsor. However, I was talking about two plan sponsors, in which case what happens at sponsor A doesn't affect what sponsor B can do. Each has the full Sec. 415(c) limit available. OTOH, Sec. 402(g) limits an individual's salary deferrals from all plans.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Just to make sure we are not talking past each other. I have an individual working for an employer that has a SIMPLE IRA and is also self-employed.

This individual has an overall limit for Defined Contribution Plans set by Sec. 415(c). No matter how many employers this individual may have, the 2012 limit is $50K. He can arrange the deferrals in any manner that he wants consistent with an employer plan, as long as the deferrals to the SIMPLE don't exceed the Sec. 408(p) limit of $11,500. So, if he wants to open his own SEP-IRA using his SE income, his contribution to that SEP is the overall limit of $50,000 less the deferrals to the SIMPLE. Sec. 402(g) sets the limit for 401(k) and 403(b) at $17,000.

We're not talking past each other. One of us is wrong. You say that the 415(c) limit is for an individual. I say it's for a plan, IOW the employer.

The 402(g) limit is for salary deferrals, and SIMPLEs are deferrals. As I've noted before, we agree that this limit is for the individual. For reasons unknown to me, SIMPLEs have a lower limit than the 402(g) limit. A person who contributed $11,500 to a SIMPLE could still contribute to another employer's 401(k), but only the remaining $5,500 of the 402(g) limit.

However, not all defined contribution plans are salary deferrals, and I still maintain that non-deferrals at one employer have zero effect on what's possible at another.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Sorry for the late reply. Somehow I didn't see your reply on the newsgroup on my laptop.

You are correct. Sec 415 is for a plan. However, that's not what confused me. What confused me was that I kept thinking the SIMPLE-IRA was a self-employed plan when in fact it was an employer plan from an employee. So, in the scenario I posited, the employee could contribute the max to his employer's SIMPLE and if he had enough SE income, he could contribute the max to a SEP-IRA.