SEP IRA excess contribution withdrawn before due date, how to account in ProConnect?

[ddoggy]

Self-employed business owner was contributing to SEP plan all year, however, year end sales did not go well, so he is reporting a loss. Since he can only contribute the lower of $61,000 or 25% of income, which is negative, he is not eligible to contribute to the SEP for 2022. 

He has requested to move the money out of the account claiming excess contribution with the brokerage. They will issue him a tax form for this transaction eventually. However, I need to file his taxes now, so how do I record this in ProConnect to avoid any penalties? He believes there will be a loss to report. 

[PhoebeRoberts]

He gets an extension until the excess contribution has been resolved. That's what happens when you do stuff without asking!

[qbteachmt · Accepted solution]

"Since he can only contribute the lower of $61,000 or 25% of income, which is negative, he is not eligible to contribute to the SEP for 2022."

Which is why it's never a good idea to contribute throughout the year.

"He has requested to move the money out of the account claiming excess contribution with the brokerage."

He gets a corrective distribution with Net Income Attributable to those contributions.

"They will issue him a tax form for this transaction eventually."

A 1099-R in 2023 with code P = prior year.

"However, I need to file his taxes now, so how do I record this in ProConnect to avoid any penalties?"

Do you have the values? You would use the 1099-R input as if you have one for 2022.

"He believes there will be a loss to report."

He's wrong. Read, for instance:

https://www.investopedia.com/articles/retirement/04/042804.asp

What he will have is a lower returned amount, if there is a loss. Gains would be taxable.

As long as the corrective distribution is made by the due date of the return, including extension, it will be as if the contribution error never happened.