Excess contribution to SEP IRA for self-employed person

[tjwieczore]

In my very first year of contributing to a self-employed SEP IRA (2024), I contributed an excess of $X (misunderstanding that the contribution was limited by NET, not GROSS earnings). I have concluded that I must file Form 5330 and have figured myself the tax owed (10% of X) BUT do I need to withdraw (ie take a distribution) from my SEP IRA also? Thanks for any general observations you may have on this topic, even if not direct advice for my scenario.

[dmertz · Accepted solution]

In what year did you make the contribution?  If you contributed in 2025 and you will have sufficient compensation to treat the $X as a contribution for 2025 instead, you can claim only the portion that you were eligible to contribute for 2024 as the contribution for 2024 and claim the $X deposited was a contribution for 2025.  The IRA custodian only tracks the year in which the contribution was made, not the year for which the contribution was made, so you are free to treat any portion of the contribution made in 2025 before your filing deadline as being for whichever of these years you like.  It's your responsibility to track the year for which the contribution is made.

Of course if you made the contribution in 2024, you can't treat any of it as a contribution for 2025 without first paying the 10% excess contribution penalty on the $X using Form 5330.  Otherwise, you should be able to obtain a return of the $X contribution (accompanied by the attributable net income) and not have to treat the $X as an excess contribution for 2024.

[tjwieczore]

@dmertz: Unfortunately I made the excess contribution IN 2024, and moreover I have already made nearly the maximum contribution IN 2025 FOR 2025. The custodian of my SEP IRA has told me that I cannot just withdraw the excess (plus applicable earnings) from my SEP but rather that I must file a Form 5330 and utilize the EPCRS. They do have an online way to take a distribution from the SEP, but presumably taking the distribution in this generic way would make me liable for tax on the distribution (as ordinary income on a 2025 1099R) PLUS 10% penalty since I am not 59 1/2. If I do not take the distribution, does filing form 5330 now and paying the IRS 10% of the excess immediately somehow get me out of dealing with. the IRA custodian and allow me to leave the excess in the IRA? Thanks for any help you are able to provide. 

[dmertz]

I'm not sure that EPCRS is necessary or that the excess cannot be corrected before the due date of your 2024 tax return:

https://www.irs.gov/retirement-plans/sep-plan-fix-it-guide-contributions-to-the-sep-ira-exceeded-the...

If the excess cannot be returned, filing 2024 Form 5330 and paying the 10% penalty would all you need to do for 2024.  For 2025 this excess will be applied as part of your 2025 contribution and whatever amount of excess you have for 2025 after adding the new SEP contributions you've made for 2025 will be an excess that needs to be reported on a 2025 Form 5330 and the 10% penalty paid.  This will continue each year until the excess is entirely absorbed.

Also, it's not clear how you know that you've already made the maximum SEP contribution for 2025 unless you already know your 2025 net profit from self-employment, which seems unlikely (but not impossible) this early in the year.  You could potentially do some other work that would increase your self-employment income during the remainder of the year and make enough it be able to absorb the excess.

[sallymorse1]

Is the contribution limited to 25% of wages or of net profit?

If it is wages, and the excess is from 2021, what is the best way to correct? Can I just submit 5330 and pay 10% of the overage?

[tjwieczore]

I dont feel I have the expertise to answer your question.

However, I resolved my own issue in this regard to my satisfaction by "asking" ChatGPT. Obviously, I am not a tax professional, cannot give tax advice, and don't know if that would work for you and your situation.

[dmertz]

For a self-employed individual, the SEP-IRA contribution limit for 2024 is 20% of net earnings or $69,000, whichever is less.  Net earnings are net profit minus the deductible portion of self-employment taxes.