Accidently contributed into SEP vs SE 401k

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dingdongditch
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Joined: Wed Mar 15, 2017 7:25 pm

Accidently contributed into SEP vs SE 401k

Post by dingdongditch » Wed Apr 19, 2017 9:12 am

Hi,

I dropped off a check at Fidelity to put a contribution into an SE 401k but they deposited it into a SEP IRA we have instead. Should we bother with getting them to fix it or is there no issue (wrt to how we can claim this on our taxes at the end of the year?)

Thanks.

DSInvestor
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Re: Accidently contributed into SEP vs SE 401k

Post by DSInvestor » Wed Apr 19, 2017 9:56 am

I'd give Fidelity a call and ask them to correct the contribution. It's probably an easy fix for them to do. Ask them if there are any implications for tax filing and if any tax forms like 1099R will be generated by this fix.

Keep in mind that Solo 401k may allow for larger contributions than SEP-IRA due to the employee salary deferral. If your contribution (intended for Solo 401k) included employee salary deferrals, you may have an excess contribution to your SEP-IRA if you do not correct it.
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Spirit Rider
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Re: Accidently contributed into SEP vs SE 401k

Post by Spirit Rider » Wed Apr 19, 2017 10:27 am

You can not contribute to a 5305 SEP IRA for a tax year you also have a 401k. Fidelity's SEP IRA is a 5305 SEP, therefore, this contribution is in error. Your options to correct this depend on the circumstances of the error.

If this really was an error on Fidelity's part, they should be able to correct this. This should be a bookkeeping correction and no reporting should be required. However, for it to be a Self-Employed (SE) 401k contribution you would have had to fill out a Contribution Remittance Form. Did you do that?

If Fidelity agrees to correct this you are all set, but if they don't agree to that, you have a SEP IRA excess contribution. What options you have depends on whether this was a contribution for 2016 or 2017.

If it was for 2017 it is simple enough, you can remove the excess SEP IRA contribution and make a 2017 SE 401k contribution.

If it was for 2016, you have until 10/16/2017 to remove the excess contribution. However, I do not believe you will be able to make a SE 401k contribution for 2016 after the tax filing deadline, if you did not file for an extension,. Effectively you will have to remove the SEP IRA excess contribution and not be able to make and deduct an employer retirement plan contribution for the 2016 tax year. You will need to amend the 2016 return to remove the Form 1040 Line 28 deduction.

If Fidelity can/will not correct this and it is a 2016 contribution, I believe there is one other option. Schwab has a prototype SEP IRA that the IRS allows to coexist with a 401k. You can retroactively amend the SEP IRA to Schwab's SEP IRA effective 1/1/17 and do a direct trustee-trustee transfer from the Fidelity 2016 SEP IRA contribution and any associated earnings to the Schwab SEP IRA. This will be a non-reportable, non-taxable transfer. There will be no need to amend the 2016 return.

dingdongditch
Posts: 19
Joined: Wed Mar 15, 2017 7:25 pm

Re: Accidently contributed into SEP vs SE 401k

Post by dingdongditch » Wed Apr 19, 2017 12:29 pm

Spirit Rider wrote:You can not contribute to a 5305 SEP IRA for a tax year you also have a 401k. Fidelity's SEP IRA is a 5305 SEP, therefore, this contribution is in error. Your options to correct this depend on the circumstances of the error.

If this really was an error on Fidelity's part, they should be able to correct this. This should be a bookkeeping correction and no reporting should be required. However, for it to be a Self-Employed (SE) 401k contribution you would have had to fill out a Contribution Remittance Form. Did you do that?

If Fidelity agrees to correct this you are all set, but if they don't agree to that, you have a SEP IRA excess contribution. What options you have depends on whether this was a contribution for 2016 or 2017.

If it was for 2017 it is simple enough, you can remove the excess SEP IRA contribution and make a 2017 SE 401k contribution.

If it was for 2016, you have until 10/16/2017 to remove the excess contribution. However, I do not believe you will be able to make a SE 401k contribution for 2016 after the tax filing deadline, if you did not file for an extension,. Effectively you will have to remove the SEP IRA excess contribution and not be able to make and deduct an employer retirement plan contribution for the 2016 tax year. You will need to amend the 2016 return to remove the Form 1040 Line 28 deduction.

If Fidelity can/will not correct this and it is a 2016 contribution, I believe there is one other option. Schwab has a prototype SEP IRA that the IRS allows to coexist with a 401k. You can retroactively amend the SEP IRA to Schwab's SEP IRA effective 1/1/17 and do a direct trustee-trustee transfer from the Fidelity 2016 SEP IRA contribution and any associated earnings to the Schwab SEP IRA. This will be a non-reportable, non-taxable transfer. There will be no need to amend the 2016 return.
So we opened a SEP IRA a month ago to contribute for my wife's SE Income for 2016, we amended our Taxes for 2016 to account for the SEP IRA contribution. We also opened the SE 401k at the same time but made no contribution at that point in time since it was opened for year 2017. The idea was:

Tax Year 2016
SEP IRA

Tax Year 2017
SE 401k
Potentially rollover SEP IRA and previous traditional IRAs into SE 401k to allow backdoor Roth IRA

We did not fill out a "Contribution Remittance Form", we asked how to contribute, and was told just bring a check made payable to Fidelity since they do not allow EFT to SE 401k. We were under the understanding that the check would contribute to the SE 401k. Looks like they failed to tell us how to properly contribute to our SE 401k. I suppose we should fill out the form and have them correct the contribution. Is there a reason we can not contribute via EFT to the SE 401k? (I guess the form is required?)

Is there an easier way to put money in your SE 401k?

DSInvestor
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Re: Accidently contributed into SEP vs SE 401k

Post by DSInvestor » Wed Apr 19, 2017 12:36 pm

dingdongditch wrote: Is there an easier way to put money in your SE 401k?
When I had a Fidelity SE 401k, I called to make my SE 401k contributions. I would specify that $X was employee contribution for tax year YYYY and $Z was employer contribution for tax year YYYY. Very easy. The rep would transfer the money from my Fidelity corporate investment account into the Fidelity SE 401k account. I was an S-Corp so I had a corporate account. If your wife is a sole proprietor and she has a taxable account at Fidelity, she may be able do something similar.
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Spirit Rider
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Re: Accidently contributed into SEP vs SE 401k

Post by Spirit Rider » Wed Apr 19, 2017 1:44 pm

DSInvestor is correct. She could open a Cash Management Account for the business and then do SE 401k contributions by phone.

So if I understand the OP correctly. You went to make a 2017 SE 401k contribution and instead it was made as a SEP IRA contribution. Was it categorized as 2016 SEP IRA contribution or a 2017 SEP IRA contribution?

Why were you making a 2017 SE 401k contribution before the 2016 tax filing deadline?
Does she have an S-Corp or a sole proprietorship?
Was this going to be an employee deferral or an employer contribution?

Excess employer contributions to a 401k can not normally be removed. It is not wise to make employer contributions without a substantial safety margin.

Also, you can not make SE 401k contributions > that what would be allowed based on the net self-employment income received to date or a prorated amount based on a reasonable projection of the net self-employment income for the year.

dingdongditch
Posts: 19
Joined: Wed Mar 15, 2017 7:25 pm

Re: Accidently contributed into SEP vs SE 401k

Post by dingdongditch » Wed Apr 19, 2017 2:53 pm

Spirit Rider wrote:So if I understand the OP correctly. You went to make a 2017 SE 401k contribution and instead it was made as a SEP IRA contribution.
Correct
Spirit Rider wrote:Was it categorized as 2016 SEP IRA contribution or a 2017 SEP IRA contribution?
There is no way to "Categorize" the contribution for SEPs at fidelity, at least none that I am aware of. You simply just EFT the money over or (now apparently) just bring them a check and they deposit it.
Spirit Rider wrote:Why were you making a 2017 SE 401k contribution before the 2016 tax filing deadline?
Because we want to start saving this money in a mutual fund just like an employer sponsored 401k. She does not have an employer sponsored 401k because she is self-employed.
Spirit Rider wrote:Does she have an S-Corp or a sole proprietorship?
sole proprietorship
Spirit Rider wrote:Was this going to be an employee deferral or an employer contribution?
employee deferral
Spirit Rider wrote:Excess employer contributions to a 401k can not normally be removed. It is not wise to make employer contributions without a substantial safety margin.

Also, you can not make SE 401k contributions > that what would be allowed based on the net self-employment income received to date or a prorated amount based on a reasonable projection of the net self-employment income for the year.
Understood, but we can make up to $18,000 of employee contributions so long as she has actually received that income.

LeeMKE
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Re: Accidently contributed into SEP vs SE 401k

Post by LeeMKE » Wed Apr 19, 2017 3:53 pm

We have a SE 401K at Fidelity and they require a check be sent in. Probably since the company bank account is not at Fidelity may be the reason. I do fill out the form each year to send with the deposit.
The mightiest Oak is just a nut who stayed the course.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Accidently contributed into SEP vs SE 401k

Post by Spirit Rider » Wed Apr 19, 2017 3:57 pm

dingdongditch wrote:There is no way to "Categorize" the contribution for SEPs at fidelity, at least none that I am aware of. You simply just EFT the money over or (now apparently) just bring them a check and they deposit it.

Understood, but we can make up to $18,000 of employee contributions so long as she has actually received that income.
Ok, with these fact patterns you are good shape.

I think you have a very good case for Fidelity to correct this as a custodian error. I would press Fidelity hard for this as it does sound like their error. That is the simplest solution.

If not, you should still be in pretty good shape. If the the year of contribution is not designated to the custodian, then it only gets designated by filing the return claiming the deduction. Since you have not done so, this can be treated as a 2017 contribution and removed as an excess contribution and earnings (if any).

It can then be properly contributed as a current year employee deferral on the SE 401k Contribution Remittance Form. The year of employer contributions are also not designated on this form. This is why it is a good idea to be cautious with employer contributions during the tax year, because you have the choice to treat any contributions after the tax year, but before the tax filing deadline (including extensions) as either current year or prior year contributions by simply claiming them on the prior year tax return or not.

Yes, you can make contributions based on either the net self-employment income received to date or if she expects to get most of her revenue later in the year, you can make contributions based on a prorated amount of a reasonable estimate of total projected net self-employment income for the year. Just be aware if it doesn't materialize in the tax year, while it is relatively easy to remove excess deferrals, excess employer contributions are a mess.

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