SEP-IRA excess contribution previous year: options? Process?

[ErnieS0]

You can fix the mistake by removing the excess amounts @SCRosu. 

See the IRS SEP Plan Fix-It Guide - Contributions to the SEP-IRA exceeded the maximum legal limits

A SEP is based on business income so its contribution limits are not related to any Roth IRA contribution limits. Transfers between the those accounts are not contributions. 

You can convert SEP money into a Roth but that is a conversion of existing money and not a transferred contribution. You can't recharacterize money from a SEP to an IRA.

[FLouise]

Hi @dmertz , I have a similar scenario: 2021 is the first year I have contributed to both a solo 401K and SEP. I did the maximum employee contribution to ROTH solo401k, and chose to put the employer contribution into SEP rather than the solo401k. I put the maximum allowable amount into SEP, and that is what I reported on my taxes.

I have since done some more research, and it looks like because of the additional employee contribution to solo401k,  the employer contribution might be further limited to half of the difference between net earnings and the employee contribution, rather than the normal calculation (although I am still not clear on this).

If that is the case, can I absorb the excess into my 2022 contribution? And do I need to submit any type of amendment, or can I just reduce my 2022 contribution by the excess amount?

[dmertz]

@FLouise , most SEP plans use Form 5305-SEP for their plan agreement.  If your SEP plan is based on Form 5305-SEP, this form that you signed indicates that you are not permitted to maintain another qualified retirement plan such as the solo 401(k).  The maximum employer contribution to a SEP plan is calculated the same way as the maximum solo 401(k) employer contribution, so there is generally no reason to have a SEP plan when you have a solo 401(k).

As far as I know, the main reason that Form 5305-SEP does not permit other plans to be maintained is for exactly the reason for which you have a concern; Form 5305-SEP does not provide any instructions for determining the maximum permissible SEP contribution when you have multiple plans.

If your SEP plan is based on Form 5305-SEP and given that you've violated its requirement that the SEP be the only plan, I would think that the SEP plan is invalid and that entire SEP contribution is an excess contribution.  If your business maintains the solo 401(k) for 2022, you would not be able to apply the excess SEP contribution as a SEP contribution for 2022.  In this case, see the IRS fix-it guide:

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

If your SEP plan instead uses a prototype SEP agreement other than Form 5305-SEP and allows the business to maintain both a SEP plan and the solo 401(k) for the same year, if the employer contribution to the SEP plan was made in 2022, any portion of that contribution can be treated as part of your SEP contribution for 2022 rather than part of the contribution for 2021.

[FLouise]

@dmertz, Thank you for the reply, this has definitely helped to clear some things up. I will look into the form 5305 to see if it is in fact a 5305 or a prototype.

Just to make sure I'm understanding everything correctly: If it is a prototype and does allow both, the contribution for 2021 which was made in 2022 won't need to be reconciled, but rather can be absorbed into my 2022 contribution.

If it is a prototype and does allow both, is this something I should correct on my 2021 tax return?

Thank you again! I have had a tough time getting clear answers on this.

[dmertz]

2021 TurboTax should already have limited your deduction to the permissible amount.  Check to see if the amount on Schedule 1 line 16 (from the Keogh, SEP and SIMPLE Contribution Worksheet line 26) is less than what you deposited into the SEP-IRA.