My client has a SEP IRA and the S Corp made contributions to the plan. The president of the S Corp plans a contribution to the SEP to reduce his tax bill, yet his contribution will be between January 1, 2014 and the filing deadline. How do I get him the proper credit for this contribution?

ANSWER

The BIDaWIZ Team's Answer:

SEP IRA contributions are employer funded. As long as the S Corporation makes the contribution into the SEP IRA account by the tax due date (i.e. today) or files for extension, he will get credit for it. The contribution is reported on Form 5498.

Having said that, is the president of the S Corporation planning to use capital from previous distributions to fund the SEP IRA? If so, that's not allowed. Contributions to a retirement plan can only be made from compensation, which, in the case of a self-employed individual, is earned income. Distributions you receive as a shareholder of an S corporation do not constitute earned income for retirement plan purposes (see IRC sections 401(c)(1) and 1402(a)(2)).