Question Regarding SEP-IRA Distributions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Question Regarding SEP-IRA Distributions

Post by krylon80 »

Hey all, I had a question regarding the tax implications of SEP-IRA distributions.

All information I'm able to find online states that SEP-IRA distribution rules follow standard IRA distribution rules.

With a standard IRA contributions are made pre-tax, so any distribution is taxable.

However, in my case, my SEP-IRA contributions were made post-tax.

In this instance, I would assume that distribution of contributions would be tax-free.

Would distribution of gains also be tax-free, like a Roth-IRA, or would they be taxed, like a standard IRA?

Thanks,
PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 11:25 am

Re: Question Regarding SEP-IRA Distributions

Post by PFInterest »

Are you sure?
The contributions would be tax free, but the gains would be taxed.
lifeisinmirrors
Posts: 134
Joined: Fri Jul 06, 2018 6:15 pm

Re: Question Regarding SEP-IRA Distributions

Post by lifeisinmirrors »

I believe all SEP IRAs are pre-tax. Those contributions should have been deducted on your 1040 form. If you did not deduct them, you could amend your returns for the past few years and get some of those taxes back.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Question Regarding SEP-IRA Distributions

Post by Spirit Rider »

As has been stated, SEP IRA contributions are always deductible (pre-tax). The only way to have made after-tax SEP IRA contributions is to fail to take the deduction or being unable to take the deduction because they were excess contributions. In either of these cases, you are not allowed to track non-deductible basis for SEP IRA contributions like you can with non-deductible traditional IRA contributions. Distributions of all SEP IRA contributions and earnings are taxable.

The SEP IRA account itself is a traditional IRA account for purposes of distributions. The only way you can have non-deductible basis in a SEP IRA account is if the custodian allowed and you made non-deductible traditional IRA contributions to that account or you rolled over non-deductible basis from other accounts. In that case you would have been tracking the basis with Form 8606.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Question Regarding SEP-IRA Distributions

Post by Spirit Rider »

lifeisinmirrors wrote: Wed Oct 03, 2018 3:00 pm I believe all SEP IRAs are pre-tax. Those contributions should have been deducted on your 1040 form. If you did not deduct them, you could amend your returns for the past few years and get some of those taxes back.
An individual must claim the SEP IRA deduction by their tax filing date including extensions. They could not amend for prior years and only have 12 days left to do so for 2018.
MarkNYC
Posts: 2999
Joined: Mon May 05, 2008 7:58 pm

Re: Question Regarding SEP-IRA Distributions

Post by MarkNYC »

Spirit Rider wrote: Wed Oct 03, 2018 3:52 pm
lifeisinmirrors wrote: Wed Oct 03, 2018 3:00 pm I believe all SEP IRAs are pre-tax. Those contributions should have been deducted on your 1040 form. If you did not deduct them, you could amend your returns for the past few years and get some of those taxes back.
An individual must claim the SEP IRA deduction by their tax filing date including extensions. They could not amend for prior years and only have 12 days left to do so for 2018.
Spirit,

Why do you believe an individual cannot file an amended return to claim a SEP deduction that was inadvertently omitted from the original tax return, assuming the contribution was made timely?
Last edited by MarkNYC on Wed Oct 03, 2018 5:28 pm, edited 1 time in total.
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

Thanks for the info, guys. The SEP-IRA account was opened by a self-employed contractor for herself, not by an employer. She opened the account with Vanguard and made post-tax contributions herself.

Are SEP-IRA contributions deducted as part of itemized deductions, in which case they could not be deducted if she opted for the standard deduction? Or would it be deducted post standard-deduction?
krow36
Posts: 2470
Joined: Fri Jan 30, 2015 5:05 pm
Location: WA

Re: Question Regarding SEP-IRA Distributions

Post by krow36 »

Read about deductions for the self-employed SEP IRA at https://www.irs.gov/pub/irs-pdf/p560.pdf
Whether the SEP is through an employer's plan, or is a self-employed SEP, the contributions are always considered as employer's contributions, not employee's contributions.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Question Regarding SEP-IRA Distributions

Post by Alan S. »

You can make several types of contributions to a SEP IRA account. Typically, a SEP IRA contribution will be made, but you can also make:
1) A regular non deductible TIRA contribution
2) A deductible TIRA contribution
3) A rollover contribution

So it is possible to make a combination of 4 types of contributions, but you must accurately flag the intended type, although you do not have to tell the custodian whether a non SEP contribution is deductible or not. That is reported on your tax return and on Form 8606 if the non SEP contribution is non deductible.

When you make the contribution, you must clearly flag it for the type of contribution intended. Most custodians will know that an amount in excess of 5500/6500 is not a TIRA non SEP contribution, but you should be clear nevertheless. Once the contribution is made, it will be reported on Form 5498 according to the type of contribution you indicated. Contributions CANNOT be recharacterized from a SEP or TIRA to the other because a SEP contribution is made by the employer and a TIRA contribution is personal. Errors must be corrected by removal and re contribution if still within the time limits.

With respect to Form 5498, SEP contributions are reported by the custodian in the year IN WHICH they are made. TIRA contributions on the other hand are reported in the year for which the contribution is assigned. Due to the potential for errors, it is generally recommended to make ONLY SEP contributions to a SEP IRA, rather than other types of contributions. That will reduce the potential for errors.
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

The contributions were made in 2018, but for the tax year 2017. I wasn't able to find a Form 8606 on the account, but I'm assuming that's because one has not been generated yet. I have no idea how the contributions were flagged. Any idea how I can determine this information (ideally looking somewhere on the Vanguard account online)?
krow36
Posts: 2470
Joined: Fri Jan 30, 2015 5:05 pm
Location: WA

Re: Question Regarding SEP-IRA Distributions

Post by krow36 »

Under Balances and Holdings, go to the SEP IRA account. Select “More account information”, then select “View contribution summary”. Choose “tax year 2017 or 2018”. Is this the information you're looking for?
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

Thaks, krow36. While following your instructions did show me what my contributions were, I already have that information. What I'm trying to determine is how those contributions were classified or "flagged" as per Alan's post (above).
krow36
Posts: 2470
Joined: Fri Jan 30, 2015 5:05 pm
Location: WA

Re: Question Regarding SEP-IRA Distributions

Post by krow36 »

Alan S. wrote: Wed Oct 03, 2018 6:54 pm You can make several types of contributions to a SEP IRA account. Typically, a SEP IRA contribution will be made, but you can also make:
1) A regular non deductible TIRA contribution
2) A deductible TIRA contribution
3) A rollover contribution
I don't think you made any of the 3 other (non-SEP) types of contributions to your SEP IRA account, because 1) and 2) are traditional IRA contributions to the SEP. In other words, you could have made a 5.5k tIRA contribution to the SEP, but you didn't did you? You made a SEP IRA contribution, based on your self-employment income. You didn't do a rollover from a 403b or 401k plan did you, so 3) doesn't apply either.

Vanguard is going to consider your contribution a SEP IRA contribution unless you've told them it's not a SEP contribution but 1), 2) or 3). I believe a SEP IRA contribution to a SEP IRA account is deductible by definition. If you didn't deduct the 2017 contribution made in 2018 on your 2017 tax return, I don't know what you can do about it. I'd rely on Alan S.'s and Spirit Rider's advice on that.
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

Thanks, krow36. I didn't realize that "TIRA" stood for "Traditional IRA". I thought it was something else. As you said, the SEP-IRA contributions were most likely standard SEP-IRA contributions, which were NOT deducted on 2017 taxes. As far as I can tell Vanguard never issued a Form 5498 tax document either.

As the goal is not to get taxed twice on the contribution amount (once pre-contribution, and once on the distribution), I would assume that the 2017 contribution (made in Jan 2018) could be included on the 2018 taxes.
krow36
Posts: 2470
Joined: Fri Jan 30, 2015 5:05 pm
Location: WA

Re: Question Regarding SEP-IRA Distributions

Post by krow36 »

Is Vanguard listing the Jan 2018 contribution for 2017 or for 2018?
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Question Regarding SEP-IRA Distributions

Post by Spirit Rider »

Unlike traditional and Roth IRAs, the custodian only reports the year the SEP IRA contribution is made in. They do not determine what year it is for.

The determination of what year contributions are for is based on what tax year's return the contribution is deducted.

Note: To deduct the contribution in 2018, there must be sufficient net self-employment earnings to justify the contribution.
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

krow36 wrote: Thu Oct 04, 2018 5:11 pm Is Vanguard listing the Jan 2018 contribution for 2017 or for 2018?
they list the Transaction Description as "Employer prior year contribution". The prior year would be 2017.
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

Spirit Rider wrote: Thu Oct 04, 2018 9:16 pm Unlike traditional and Roth IRAs, the custodian only reports the year the SEP IRA contribution is made in. They do not determine what year it is for.

The determination of what year contributions are for is based on what tax year's return the contribution is deducted.

Note: To deduct the contribution in 2018, there must be sufficient net self-employment earnings to justify the contribution.
Thanks, Spirit Rider. If that is true, then why would the custodian (who I'm assuming is Vanguard) list the Transaction Description as "Employer prior year contribution"? To me, that IS specifying which year the contribution is applied to, which in this case would be 2017.
krow36
Posts: 2470
Joined: Fri Jan 30, 2015 5:05 pm
Location: WA

Re: Question Regarding SEP-IRA Distributions

Post by krow36 »

I don’t think you have a double taxation problem. You missed out on making a SEP IRA contribution for 2017 by not taking the deduction on line 28 of your 2017 Form 1040. Yes you can take the deduction when you file your 2018 1040 if you have 2018 self-employment income to justify the Jan 2018 contribution.

It doesn’t matter that Vanguard says it was for 2017. They don’t know when you’ll take the deduction. In May 2019 Vanguard will send you and the IRS the Form 5498 which will give the total SEP IRA contributions you made during 2018. It doesn’t separate out contributions made in 2018 for 2017 from those for 2018. That is determined by when you take the deduction.
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

krow36 wrote: Fri Oct 05, 2018 10:05 am I don’t think you have a double taxation problem. You missed out on making a SEP IRA contribution for 2017 by not taking the deduction on line 28 of your 2017 Form 1040. Yes you can take the deduction when you file your 2018 1040 if you have 2018 self-employment income to justify the Jan 2018 contribution.

It doesn’t matter that Vanguard says it was for 2017. They don’t know when you’ll take the deduction. In May 2019 Vanguard will send you and the IRS the Form 5498 which will give the total SEP IRA contributions you made during 2018. It doesn’t separate out contributions made in 2018 for 2017 from those for 2018. That is determined by when you take the deduction.
Yeah, that's what I was assuming, that Vanguard would send the Form 5498 for 2018, which could then be used on the 2018 taxes. That being said, if the intent was for the 2018 contributions to be deducted from 2017's taxes, how could that have even been done without the Form 5498 from Vanguard?

The only issue I foresee is that while my friend was self-employed for all of 2017, she was not self-employed for most of 2018, therefore I'm not sure if 2018 self-employed income would be high enough to justify the amount of the contribution. Do you know what the maximum allowable percentage of self-employed income is for a SEP-IRA contribution?
krow36
Posts: 2470
Joined: Fri Jan 30, 2015 5:05 pm
Location: WA

Re: Question Regarding SEP-IRA Distributions

Post by krow36 »

[krylon80 post_id=4150284 time=1538753877 user_id=35547]
Yeah, that's what I was assuming, that Vanguard would send the Form 5498 for 2018, which could then be used on the 2018 taxes. That being said, if the intent was for the 2018 contributions to be deducted from 2017's taxes, how could that have even been done without the Form 5498 from Vanguard?
The Form 5498 is sent in May and covers the previous year's activity. It won't have to do with deductions, only with the SEP contributions of 2008. You don't use it for anything, just keep it for your records. You can google the Form 5498 and look at the form and its instructions to confirm this.

The only issue I foresee is that while my friend was self-employed for all of 2017, she was not self-employed for most of 2018, therefore I'm not sure if 2018 self-employed income would be high enough to justify the amount of the contribution. Do you know what the maximum allowable percentage of self-employed income is for a SEP-IRA contribution?
It’s based on 25% of her self-employment earnings from Schedule C less half of the FICA tax. The BH Wiki explains it for the self-employed much better than I can. https://en.wikipedia.org/wiki/SEP-IRA

The directions on pages 6 and 7 of Pub 560 deal with how the allowed SEP contribution for the self-employed is calculated. Chapter 5 of Pub 560 has the tables and worksheets needed for the calculation. Carryover of excess contributions is discussed on page 7.
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

krow36 wrote: Fri Oct 05, 2018 12:12 pm [krylon80 post_id=4150284 time=1538753877 user_id=35547]
Yeah, that's what I was assuming, that Vanguard would send the Form 5498 for 2018, which could then be used on the 2018 taxes. That being said, if the intent was for the 2018 contributions to be deducted from 2017's taxes, how could that have even been done without the Form 5498 from Vanguard?
The Form 5498 is sent in May and covers the previous year's activity. It won't have to do with deductions, only with the SEP contributions of 2008. You can google the Form 5498 and look at the form and its instructions to confirm this.
Why would they send a form in May for the previous year if the previous year's taxes are due in April?

Also, I just learned that all self-employment income was earned in 2017. No self-employment income was earned in 2018. Given that, I do not think it would be possible to claim a contribution deduction on 2018 taxes. It will have to be claimed on 2017 taxes somehow, or a special exception would have to be made allowing it to be claimed on 2018 taxes.
krow36
Posts: 2470
Joined: Fri Jan 30, 2015 5:05 pm
Location: WA

Re: Question Regarding SEP-IRA Distributions

Post by krow36 »

krylon80 wrote: Fri Oct 05, 2018 12:35 pm Why would they send a form in May for the previous year if the previous year's taxes are due in April?
The Form 5498 must have its uses (to Vanguard and/or the IRS?), but I don't know what use they are to the SEP IRA contributor, other than to confirm the prior year's contributions.
Also, I just learned that all self-employment income was earned in 2017. No self-employment income was earned in 2018. Given that, I do not think it would be possible to claim a contribution deduction on 2018 taxes. It will have to be claimed on 2017 taxes somehow, or a special exception would have to be made allowing it to be claimed on 2018 taxes.
Oh dear! I can only guess what her best course of action is. I wonder if she will have to remove the SEP IRA contribution and have it included as 2018 income? Hopefully she can avoid penalties. Spirit Rider and Alan S. should be your guide.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Question Regarding SEP-IRA Distributions

Post by Spirit Rider »

If a self-employed individual made a SEP IRA contribution in Jan 2018 for 2017 net self-employment earnings, but a deduction was not taken on their tax return. They can simply file a 2017 amended return in the next 10 days claiming the deduction on Form 1040 Line 28. Note: This is an adjustment to income, above the line, reduces the AGI and has nothing to do with standard/itemized deductions.

If they have no net self-employment earnings in 2018, the SEP IRA contributions can not be deducted for 2018. They need to get busy and amend their 2017 return NOW.

As I already pointed out. A SEP IRA contribution is only reported by the custodian to the IRS for the year in which the contribution is made, not what tax year the contribution is deducted.

See the 2018 Instructions for Forms 1099-R and 5498, emphasis mine.

Box 8. SEP Contributions
Enter employer contributions made to a SEP IRA
(including salary deferrals under a SARSEP) during 2018, including contributions made in 2018 for 2017, but not including contributions made in 2019 for 2018. Trustees and issuers are not responsible for reporting the year for which SEP contributions are made. Do not enter employee contributions to an IRA under a SEP plan. Report any employee contributions to an IRA under a SEP plan in box 1. Also include in box 8 SEP contributions made by a self-employed person to his or her own account.
Topic Author
krylon80
Posts: 25
Joined: Wed Mar 28, 2012 11:52 am

Re: Question Regarding SEP-IRA Distributions

Post by krylon80 »

Thanks, Spirit Rider, great info! I'll let her know to get going straight away.
MarkNYC
Posts: 2999
Joined: Mon May 05, 2008 7:58 pm

Re: Question Regarding SEP-IRA Distributions

Post by MarkNYC »

Spirit Rider wrote: Fri Oct 05, 2018 4:11 pm If a self-employed individual made a SEP IRA contribution in Jan 2018 for 2017 net self-employment earnings, but a deduction was not taken on their tax return. They can simply file a 2017 amended return in the next 10 days claiming the deduction on Form 1040 Line 28. ... They need to get busy and amend their 2017 return NOW.
Spirit,

What is your basis for stating that, in this situation, a 2017 amended return must be filed by Oct 15, 2018, rather than within the normal 3-year time limit?
MarkNYC
Posts: 2999
Joined: Mon May 05, 2008 7:58 pm

Re: Question Regarding SEP-IRA Distributions

Post by MarkNYC »

krow36 wrote: Fri Oct 05, 2018 10:05 am It doesn’t matter that Vanguard says it was for 2017. They don’t know when you’ll take the deduction. In May 2019 Vanguard will send you and the IRS the Form 5498 which will give the total SEP IRA contributions you made during 2018. It doesn’t separate out contributions made in 2018 for 2017 from those for 2018. That is determined by when you take the deduction.
I disagree with the assertion that the tax year of a SEP contribution is determined by which year's tax return reports the deduction.

While it's true the custodian does not indicate on Form 5498 which tax year the contribution(s) applies to, the taxpayer does have an obligation at the time of the contribution to designate the contribution year. This can be done by writing the tax year on the check, indicating the tax year on the deposit slip, or other written directions.

In addition, the taxpayer/employer must provide each participant with a written statement indicating the amount of the employer's SEP contribution for the year, and this statement must be issued by either Jan 31 following the end of the plan year or within 30 days of the contribution. (see Reg 1.408-9(b))

Without any written evidence of the tax year of a specific SEP contribution, the taxpayer will be at the mercy of the IRS upon audit as to whether any SEP deduction will be allowed for the year.
Post Reply