Exceeded contribution limits on my SEP-IRA + Solo 401k - how to fix this mistake?
I just completed my first year as a self-employed person and I think I've completely misunderstood the retirement contribution rules. I set up both a SEP-IRA and a solo 401k thinking I was being smart about retirement planning, but now I'm worried I messed up big time. I contributed $28,500 to my SEP-IRA and $22,500 to my solo 401k as employee contributions, totaling $51,000. My self-employment income was around $160k, so 25% of that would be $40,000. I originally thought the 25% income limit applied separately to each account (SEP-IRA and solo 401k), but while working on my taxes, I discovered the limit is for TOTAL employer contributions across both accounts! This means I've over-contributed by about $11,000. Ugh. I was trying to be responsible with my retirement savings and instead I've screwed it up. Does anyone know what penalties I might face for this mistake? Is there a way to fix this excess contribution before filing? Really appreciate any help here!
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Tami Morgan
The good news is that this can be fixed! First, you need to understand the actual limits correctly. For 2025, the employee contribution limit for a solo 401(k) is $22,500 (plus $7,500 catch-up if you're over 50). This employee contribution doesn't count against the 25% of net income limit. The 25% limit applies to the employer contributions portion, which you can make to either the SEP-IRA or as employer contributions to your solo 401(k), but not both for the same dollars. The total limit across all qualified retirement accounts is $69,000 for 2025 (or $76,500 if over 50). You mentioned contributing $28,500 to the SEP-IRA and $22,500 as employee contribution to the solo 401(k). The SEP-IRA contribution is considered an employer contribution, so that plus your solo 401(k) employee contribution is technically allowed if your income supports it. The issue is you can't make employer contributions to both a SEP-IRA and a solo 401(k) in the same tax year that exceed the 25% of net income limit. To fix this, you should request an excess contribution withdrawal from your SEP-IRA administrator before your tax filing deadline (including extensions). They'll help you remove the excess amount plus any earnings on that portion.
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Maya Diaz
•Thank you for this explanation! So to clarify - the $22,500 I put into my solo 401k as an employee contribution is completely separate from the 25% limit? And the 25% limit (which would be $40,000 in my case) only applies to employer contributions, which could be either SEP-IRA contributions or employer contributions to the solo 401k? If that's true, would I only be over by about $5,000 instead of $11,000? Also, what happens if I don't fix this before filing? Are the penalties severe?
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Tami Morgan
•Yes, you've got it right! The $22,500 employee contribution to your solo 401(k) is separate from the 25% limit. The 25% limit (approximately $40,000 in your case) applies only to employer contributions, which can be made either to your SEP-IRA or as employer contributions to your solo 401(k), but not both in excess of that limit. If you don't fix the excess contribution before your tax filing deadline (including extensions), you'll face a 6% excise tax on the excess amount for each year it remains in the account. This would be reported on Form 5329. Additionally, when you eventually withdraw that excess amount, you'd be taxed on it again, effectively creating double taxation. It's definitely worth fixing now rather than paying penalties year after year.
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Rami Samuels
I had a similar situation last year and found https://taxr.ai incredibly helpful for figuring out my retirement contribution limits. I was confused about SEP-IRA vs Solo 401k rules since I had both W-2 and self-employment income. The site analyzed all my documents and showed me exactly how much I could contribute to each account without penalties. They have a specific calculator for self-employment retirement contributions that breaks down the 25% limit and shows you how employee vs employer contributions work. Would have saved me a lot of headache when I was in your shoes. They even generate a personalized report explaining which forms you need to file to correct over-contributions.
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Haley Bennett
•Does it really work with both SEP-IRA and Solo 401k scenarios? Most tax software I've used gets confused when I have both. Also, can it tell me how much I need to withdraw if I've already over-contributed? My situation is even messier than OP's because I also have a regular 401k from my part-time job.
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Douglas Foster
•I'm skeptical about these online calculators... How does it handle the reduced contribution limits when you have self-employment income but also work a W-2 job with a 401k? My accountant says those calculations get super complicated because of the combined limits.
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Rami Samuels
•Yes, it absolutely handles both SEP-IRA and Solo 401k scenarios together - that's exactly what I needed help with. It's not just a basic calculator; it analyzes your specific tax situation and documents to provide personalized guidance. You can upload your W-2s, 1099s, and previous contribution statements, and it will calculate your exact limits. For those with both self-employment and W-2 income with an employer 401k, it accounts for the combined annual limits across all your retirement accounts. That's actually where most people (and many tax professionals) get confused. It specifically shows you how much room you have left for each type of contribution based on your unique income sources.
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Haley Bennett
Just wanted to follow up and say I tried https://taxr.ai after seeing it mentioned here, and it was exactly what I needed! I uploaded my 1099s, W-2s, and my contribution statements from both my SEP-IRA and Solo 401k. Within minutes, I got a detailed report showing that I had over-contributed by $3,200 to my SEP-IRA. The best part was that it generated step-by-step instructions for correcting the excess contribution, including the exact forms I needed and a letter template for my SEP-IRA administrator. I was able to fix everything before the tax deadline, and it saved me from paying those ongoing penalties someone mentioned. Definitely worth checking out if you're in this situation!
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Nina Chan
When I had similar issues with retirement contribution limits, I spent WEEKS trying to get someone from the IRS on the phone for guidance. Called 15+ times and couldn't get through. Finally found https://claimyr.com which got me connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly how to calculate my limits and fix my over-contribution. They confirmed that I needed to withdraw the excess from my SEP-IRA before filing and explained how to report it correctly on my taxes. Saved me from a ton of stress and potential penalties.
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Ruby Knight
•Wait, how does this actually work? I thought it was impossible to get through to the IRS lately. Do they just keep calling for you or something? I'm literally on hold with them right now about my own retirement account mess-up.
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Douglas Foster
•This seems too good to be true. I've tried calling the IRS dozens of times about my own excess contribution issue and never got through. If this actually works, it would be worth trying, but I'm suspicious of any service claiming to bypass the infamous IRS hold times.
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Nina Chan
•It uses a system that navigates the IRS phone tree and holds your place in line, then calls you once an agent is about to pick up. So instead of you waiting on hold for hours, their system does it for you. When an agent is about to answer, you get a call connecting you directly. Think of it like having someone stand in line for you at the DMV. They don't have special access or anything shady - they're just taking over the tedious waiting part. It worked really well for me, and the IRS agent I spoke with was super helpful with my retirement contribution questions. Definitely better than trying to interpret the IRS publications on my own.
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Douglas Foster
I have to admit I was completely wrong about Claimyr. After my skeptical comment yesterday, I decided to try it this morning out of desperation. I had been trying to reach the IRS for over a month about my excess contributions to both my SEP-IRA and 401k. The service actually worked exactly as described. I received a call back in about 35 minutes and was connected with an IRS representative who specialized in retirement plans. They confirmed exactly what I needed to do: withdraw the excess contribution from my SEP-IRA (about $7,400 in my case) plus any earnings before my filing deadline, and file Form 5329 to report the correction. The agent also explained that I could leave my solo 401k employee contribution alone since that wasn't subject to the 25% limit. Huge relief to have this sorted out before tax day!
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Diego Castillo
One important thing to consider - the calculations for self-employment income can get tricky. Remember that the 25% limit is actually on your net self-employment income AFTER deducting the self-employment tax. This often trips people up. For example, if your gross self-employment income is $160k, after the self-employment tax deduction, the amount you can use for calculating the 25% employer contribution limit is lower. Make sure you're using the right base number or you might still end up with an excess contribution.
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Logan Stewart
•That's a super important point most people miss! Also worth noting that if you're using a SEP-IRA, the actual calculation is 20% of net self-employment income, not 25%. The 25% applies to W-2 compensation or to Solo 401k calculations. I see this mistake all the time with my clients.
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Diego Castillo
•You're absolutely right about the distinction between 20% for SEP-IRA vs. 25% for Solo 401k calculations. That's another common area of confusion. The reason for this difference is that when calculating for a SEP-IRA, you must first reduce your net earnings by the deduction for one-half of your self-employment tax AND by the SEP contribution itself. This creates a circular calculation that effectively reduces the percentage to about 20% rather than the stated 25%. For Solo 401k employer contributions, you still deduct half the self-employment tax but not the contribution itself, allowing for the full 25%.
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Mikayla Brown
Has anyone actually gone through the process of withdrawing excess contributions from a SEP-IRA? I'm in a similar situation (contributed about $9k too much) and wondering how complicated the process is. Do I need to specify which investments to sell if the money is already invested? And do I need to calculate the earnings myself or does the brokerage handle that?
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Sean Matthews
•I had to withdraw excess SEP-IRA contributions last year. The process wasn't too bad - I called my provider (Fidelity) and told them I needed to do an "excess contribution removal." They had a special form for this purpose. They calculated the earnings portion for me based on the performance of my investments during the time the excess was in the account. I did have to specify which investments to sell to generate the cash for the withdrawal. Once processed, they sent me a 1099-R the following January showing the distribution coded properly as an excess contribution return. Definitely do this before filing your taxes if possible!
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Victoria Jones
I went through this exact same situation two years ago and can share some practical steps that worked for me. First, don't panic - this is more common than you think and is fixable. Here's what I learned: You're correct that you can't make employer contributions to both a SEP-IRA and Solo 401k that exceed the 25% limit in total. However, your $22,500 employee contribution to the Solo 401k is completely separate from this limit and is fine. For the SEP-IRA excess withdrawal, contact your provider immediately. Most major brokerages (Fidelity, Schwab, Vanguard) have dedicated forms for this. They'll calculate any earnings on the excess amount and remove both the excess contribution and earnings. You'll get a 1099-R next year, but it won't be taxable income since it's coded as an excess contribution return. One tip: if your investments have lost value since you made the contribution, you might actually get back less than you contributed, which reduces the amount you owe taxes on. The key is to do this before your tax filing deadline (including extensions) to avoid the 6% annual penalty. Also double-check your net self-employment income calculation - make sure you're deducting half of your self-employment tax before calculating the 25% limit. This often reduces the excess amount more than people expect.
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Zara Khan
•This is incredibly helpful, thank you! I'm curious about the timing aspect - if I'm filing an extension, does that give me until October to fix this, or do I still need to handle it by April 15th? Also, when you mention that losses could actually work in my favor, does that mean if my SEP-IRA investments are down since I made the contributions, I'd withdraw less than the $5,000-ish excess I contributed but still be considered "fixed" for tax purposes? I'm also wondering if anyone has experience with how long the excess contribution removal process typically takes. I want to make sure I have enough time to get this sorted before whatever the real deadline is.
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