8606 Non-ded IRA and SEP

[sengsational]

I've got an old non-deductible SEP contribution that looks like it's going to get taxed twice?

The purpose of form 8606 is to report nondeductible contributions (NDCs) you made to traditional IRAs, as well as doing the math on what part of a distribution is taxable. I'm wondering about the reporting of NDCs to traditional IRAs vs SEP IRAs.

The instructions say "For purposes of Form 8606, a traditional IRA is an individual retirement account or an individual retirement annuity other than a SEP, SIMPLE, or Roth IRA."

The form collects NDCs to build-up a basis over the years of NDCs. The instructions for the NDC line says "Enter your nondeductible contributions to traditional IRAs". So based on the traditional IRA definition, nondeductible SEP contributions would never get added to the basis.

When I was self-employed, I started an SEP for myself. Not huge money, but I must have figured it would be a good deal (it was 2002, so not sure what I was thinking).

The way it looks to me, I'll be paying taxes on that contribution again when it comes out. What am I missing?

 

[Senator]

If my memory is correct, a SEP IRA is deductible from your business income. You did not pay taxes on it originally. Only when you withdrawal it. Up to 25% of your compensation.

I had one in 1997 or so, and eventually converted it to a Roth.

 

[target2019]

SEP contributions are normally deducted against your personal income. Yours were not deducted, so they go towards a basis. Tax software should be leading you to enter beginning and ending balance each year, as well as entering a basis.

The effect is that when you withdraw, only extra earnings above basis are taxed.

Of course, that is just my interpretation.

 

[RE2Boys]

Checking the IRS website, I could not find any reference where non-deductible contributions are allowed in a SEP IRA. I suspect that if such contributions were made, they were not allowed, and since it is too late to amend your 2002 return, any withdrawals are fully taxable.

SEP IRA contributions are deductible regardless of your income (different rules than a Traditional IRA) so there would be no reason or impediment not to take the deduction. If you did such a contribution, the error was done back in 2002 and I suspect it can't be corrected at this time.

However, the IRS allows you to also use the same fund (bank, brokerage) account as your traditional IRA account.....not requiring you to have two separate accounts for SEP IRA and T-IRAs. So the money could be co-mingled in a specific bank account.

As long as you filed a Form 8606 for 2002 when you made a non-deductible contribution to a Traditional IRA (and maybe put in same account as your SEP IRA), you should have no problem with using the 8606 in future tax returns. If you did NOT file the 8606, then you do not have a basis in the IRA that the IRS will recognize.

 

[target2019]

There is a discussion at b#heads about this.
https://www.bogleheads.org/forum/viewtopic.php?t=166227
Investing is too complex.

 

[RE2Boys]

There is a discussion at b#heads about this.
https://www.bogleheads.org/forum/viewtopic.php?t=166227
Investing is too complex.

Yes, very good information there.

Another source, especially for those who use TurboTax is The TurboTax AnswerXchange at https://ttlc.intuit.com/

It's decent for how to do something in TurboTax, less for tax law/theory. While there are CPAs and Enrolled Agents that participate, it is a user-to-user forum and frankly, some folks don't know squat.

 

[sengsational]

If my memory is correct, a SEP IRA is deductible from your business income. You did not pay taxes on it originally. Only when you withdrawal it.

That's it!

I put a 'hunk of money' in the SEP. When I ran the numbers, it turned out I put in too much for my business income, and the rest went in as deductible (and was included on the 8606).

The problem was that I decided to do an "audit" on my 8606's (my first one was in 1982!) I collected all of the non-deductible contribution cash flows to IRAs and SEPs, and the total came up to be greater than what was showing on the 8606's. The 'hunk of money' was really two hunks. One made by the "employer" and one by me. Thanks, all, for helping me figure this out.