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(I just tried to post this, but I don't think it went through. Sorry if this is a repeat)

I'm new around here, so please let me know if this is not the place to post this. I posted on the taxes board yesterday, and was told this might be a better forum.

I contributed too much to my 1996 SARSEP. I was not notified by my employer until Dec 1997. Basically, I'm wondering what to do about it now. I've researched this issue a lot, and I'm very confused, but this is what I know now.

I recently read Form5305A-SEP, and it seems like I need to remove the excess contribution before April 15 of the year following the year I was notified (Apr 15, 1998). This would not be a problem, but I've heard that I also have to remove all income/earnings from the excess contribution. That could get tricky. Actions I would have to take: figure out how much that is, sell that much of my mutual funds (can I sell that many $ from one fund even though it went into several?), and report it as income for 1997 (or 1998?).

Other forms and publications seem to imply that the deadline is April 15 of the year following the contribution year (Apr 15, 1997), but I can't quote chapter and verse on that (I read Pub590, and probably got the impression from there, but I don't think it's clearly stated).

My understanding is that excess contributions that are not removed by the deadline are treated as regular IRA contributions. I did not contribute my max IRA contribution in 1996, so this seems like it may be the easiest way. Actions I would have to take: fill out 1996-8606 to report non-deductible IRA contribution, fill out 1996-1040X to report extra 1996 income, pay tax and interest (and penalties?).

Thanks for any help,
Ingrid
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Greetings, Ingrid, and welcome.

<<I contributed too much to my 1996 SARSEP. I was not notified by my employer until Dec 1997. Basically, I'm wondering what to do about it now. I've researched this issue a lot, and I'm very confused, but this is what I know now.

I recently read Form5305A-SEP, and it seems like I need to remove the excess contribution before April 15 of the year following the year I was notified (Apr 15, 1998). This would not be a problem, but I've heard that I also have to remove all income/earnings from the excess contribution. That could get tricky. Actions I would have to take: figure out how much that is, sell that much of my mutual funds (can I sell that many $ from one fund even though it went into several?), and report it as income for 1997 (or 1998?).

Other forms and publications seem to imply that the deadline is April 15 of the year following the contribution year (Apr 15, 1997), but I can't quote chapter and verse on that (I read Pub590, and probably got the impression from there, but I don't think it's clearly stated).

My understanding is that excess contributions that are not removed by the deadline are treated as regular IRA contributions. I did not contribute my max IRA contribution in 1996, so this seems like it may be the easiest way. Actions I would have to take: fill out 1996-8606 to report non-deductible IRA contribution, fill out 1996-1040X to report extra 1996 income, pay tax and interest (and penalties?). >>

Actually, the publication you want to read in this instance is IRS Pub 575, Pension and Annuity Income. That's the one that talks to excess contributions to SARSEPS.

Basically, that pub gives you an out. If you don't take the excess out of the plan (or if the plan won't let you), you still include it in your gross income for that year. That means you must pay taxes on it. However, when it finally is taken out of the plan some years later, it will be taxed again.

In your case, that means you'll have to file an amended return and pay taxes and penalty due on the previously unclaimed income. If you take the money out of the plan, the excess contribution is reported as income for 1996, but the earnings thereon is reported as income for 1998. No early withdrawal penalty will be due on either amount. You had until April 15, 1997 to make a contribution to a traditional IRA for 1996. That date has passed. Therefore, I fail to see how you can now designate the excess SARSEP contribution as a traditional IRA contribution, deductible or not. Perhaps, though, there is a tax loophole that allows this of which I'm unaware.

Take this experience as a lesson learned. A retirement plan participant is responsible for the total amount of contributions from their pay to those plans, not the employer. Therefore, you want to examine your W2 carefully on receipt to ensure limits haven't been exceeded. That way, you can correct things before April 15 of the following year. Makes things much easier that way.

Regards…..Pixy

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First of all, I want to thank you for taking the time to answer my questions. I have been so confused about this issue, and I was starting to think I'd just have to guess, and explain to the IRS if I ever got audited -- not something I was happy about doing, but I was having trouble getting a straight answer. Anyway, thanks.

<< Take this experience as a lesson learned. A retirement plan participant is responsible for the total
amount of contributions from their pay to those plans, not the employer. Therefore, you want to
examine your W2 carefully on receipt to ensure limits haven't been exceeded. That way, you can
correct things before April 15 of the following year. Makes things much easier that way. >>

DEFINITELY! I will never invest before learning the rules. I will never invest before learning the rules. I will never ...

Luckily for me, my previous employer is helping me out of this mess. They're changing the excess 1996 contribution into 1997 contribution. So, as soon as I get the fixed W2's, I'll be set. Mostly.

I only worked for that company for part of 1997, and my new employer does not have a retirement plan. Does the SARSEP contribution limit (15% of salary) consider all 1997 salary or just the salary from the employer sponsoring the SARSEP? I can't find this issue dealt with in any of the IRS docs I've looked at.

Ingrid
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Ingrid,

<<Luckily for me, my previous employer is helping me out of this mess. They're changing the excess 1996 contribution into 1997 contribution. So, as soon as I get the fixed W2's, I'll be set. Mostly.

I only worked for that company for part of 1997, and my new employer does not have a retirement plan. Does the SARSEP contribution limit (15% of salary) consider all 1997 salary or just the salary from the employer sponsoring the SARSEP? I can't find this issue dealt with in any of the IRS docs I've looked at.>>

Technically, it is 15% of the salary at your former job, not your salary for the year. If you're over, remove it before April 15, 1998.

Regards……Pixy
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