Advanced Underwriting Consultants

Question of the Day – February 27

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question:  My client already sponsors a SEP IRA at his business.  Can he add a Section 412(e)(3) plan also without terminating the SEP plan?

Answer:  The business owner will probably have to amend his SEP IRA plan document to accomplish his objective.

Here’s an excerpt from the IRS website:

If I have a SEP, can I also have other retirement plans?

You can maintain both a SEP and another plan. However, unless the other plan is also a SEP, you cannot use Form 5305-SEP; you must adopt either a prototype SEP or an individually designed SEP.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – April 26

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is 75 years old and self-employed.  Is he eligible to establish and contribute to a SEP IRA?

Answer: Yes.  In fact if he sets up a SEP for his business, he is required to make contributions to it for himself if any contributions are made for a tax year.

However, even though he is making contributions to the SEP, he will also be required to take minimum distributions from the same account.  His RMDs will be calculated from the SEP IRA in the same way that they are calculated for any other IRA.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – January 20

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is the 100% owner of a business, and has implemented a Simplified Employee Pension (SEP).  The client has determined that he contributed too much to his own SEP IRA for 2011.  What are the penalties for doing so, and how can he fix the situation?

Answer: Here is a link to an IRS website with information about SEP IRA contributions:  http://www.irs.gov/retirement/article/0,,id=111419,00/#contributions

Here is the specific question and answer regarding withdrawal of over-contributions to a SEP IRA contained on the website:

What are the consequences to employees if excess contributions are made?

If contributions are made in an amount that is more than is allowed, there are tax implications for the employer and the employees. Excess contributions are included in employees’ gross income. If an employee withdraws the excess contribution, and earnings on such amount, before the due date for filing his/her return, including extensions, the employee will avoid a 6% excise tax imposed on excess SEP contributions in an IRA. Excess contributions left in the employee’s SEP-IRA after that time may result in adverse tax consequences to the employer and the employee. If the employer contributes more than it may deduct, it may be subject to a 10% excise tax.

For the business owner in this case, he may withdraw the excess SEP contributions from his IRA, including any earnings on the excess contributions, by the due date for his 2011 return, including extensions.  That will allow the employee to avoid the 6% excess contribution excise tax.

The returned contributions will be taxed as extra compensation the employee/owner.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – December 13

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Here’s the question of the day.

Question: Can my client, who also participates in a SEP IRA, make a nondeductible contribution to a traditional IRA in 2011?

Answer: Unlike the rules with regard to Roth IRA or deductible traditional IRA contributions, there is no maximum amount a client can earn while being eligible to make a nondeductible contribution to a traditional IRA—even if the client participates in another pension plan.

Any taxpayer is eligible to make a nondeductible traditional IRA contribution, so long as they are

  • younger than 70 ½ in the year of contribution, and
  • have earned income at least as big as the contribution.

Nondeductible IRA contributions must be coordinated with deductible IRA or Roth IRA contributions.  The maximum that can be contributed to any combination of those accounts is $5,000 in 2011 for a taxpayer younger than 50, $6,000 for those 50 or older.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 21

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Here’s the question of the day.

Question: What are the deadlines for an employer to establish a SEP IRA or a SIMPLE IRA?

Answer: A SEP is funded with employer contributions only.  It can be set up and funded for a year as late as the due date (including extensions) of the business’s income tax return for that year.

SIMPLE IRA plans accept both employer and employee contributions.  They are always calendar year plans and ordinarily can be set up any time between January 1 and October 1 of a year.

There are two exceptions to the rule: if the employer is a new business that comes into existence after October 1 of a particular year, the SIMPLE IRA can be set up as soon as administratively feasible.  Also, if the business has ever maintained a SIMPLE IRA in the past, a new SIMPLE IRA can be established only on January 1.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.