SEP IRA Contribution with NOL - How to Handle Non-Deductible Amounts?

Wait, so are you saying there's no way to keep that money in the retirement account? That seems crazy. What if I convert the SEP to a Roth IRA? Would that be a way to handle it without penalties since I've already paid tax on it (or rather, not gotten any deduction for it)?

You're asking a great question about potential Roth conversions. Converting the SEP IRA to a Roth could be an option, but the timing matters significantly. Since you didn't receive a deduction for the contribution, you would ideally only pay tax on any earnings that occurred between the contribution and conversion date, not on the contribution amount itself. Regarding keeping the money in the retirement account, the issue isn't that you can't have the money in a retirement account - it's that SEP contributions are specifically tied to self-employment earnings, and when those earnings are negated by losses, it creates a technical excess contribution situation. The IRS generally wants SEP contributions to be based on actual net earnings.

How exactly does this service work? Do you actually talk to a tax professional or is it just some automated system? I'm hesitant to share my tax docs with random websites.

I'm interested but skeptical. Does it actually handle something as specific as SEP contributions with NOLs? Most tax software I've used gets confused by anything beyond basic scenarios.

It's a document analysis system that uses AI to identify specific tax scenarios in your documents. You upload your tax forms and it identifies issues like yours, then provides detailed explanations. No need to schedule appointments or pay hourly rates - it analyzes everything and gives you a detailed report. The system is specifically designed for complex scenarios that most tax software misses. SEP contributions with NOLs is exactly the kind of edge case it handles well. It identified all the relevant sections from the tax code and provided specific options with the pros and cons of each approach.

Wait how does this even work? The IRS phone system is completely broken - are you saying this magically gets you through the phone tree?

Yeah right. Nobody gets through to the IRS in 20 minutes. I've been trying for months. This sounds like a scam to me.

It works by continuously calling the IRS for you using their system until it gets through, then it calls you and connects you directly to the IRS agent. It basically handles the horrible wait time for you so you don't have to sit on hold for hours. I was super skeptical too initially. But I was desperate after waiting on hold for over 3 hours and getting disconnected twice. The service actually worked exactly as advertised - I got a call back when they reached an agent, and I was talking to a real IRS person in about 15 minutes. The agent I spoke with gave me the official guidance on my SEP situation, which was exactly what I needed.

Really? I didn't know you could recharacterize from a SEP to a traditional IRA. That might at least help with part of the contribution. Do you know if there's a deadline for doing this recharacterization?

Yes, you can recharacterize from one type of IRA to another, but you need to do it by your tax filing deadline plus extensions. So if you filed for an extension until October, you still have time to do this. Note that you can only recharacterize up to the annual traditional IRA contribution limit, which won't cover your entire SEP contribution. But it's better than completely removing all funds or facing penalties on the entire amount.

This is actually solid advice. I'm a business consultant and I've seen many cases where incorrect allocations between businesses owned by the same person created artificial losses in one entity while the other showed large profits. Worth checking before making retirement account decisions.

Unfortunately, SEP IRA contributions can't be carried forward like some other business deductions. The contribution must be based on your current year's net self-employment earnings, and if those earnings are offset by losses (resulting in zero or negative net earnings), then you don't have eligible compensation to support the SEP contribution for that year. This is different from NOL carryforwards, which allow you to carry business losses to offset future income. SEP contributions are tied specifically to the year's compensation, so if there's no net self-employment income in the contribution year, the contribution becomes excess and subject to penalties unless removed. The IRS is pretty strict about this - they want retirement contributions to be supported by actual earned income in the year the contribution is made.

This is really helpful - thank you for breaking it down so clearly! I think I was getting confused because I kept thinking of it like a traditional IRA where you can make non-deductible contributions. The fact that SEP contributions are strictly tied to net self-employment earnings makes sense now. Given the amounts involved, I'm definitely going to need professional help with this. The 6% penalty on $69K would be over $4,000 per year if I don't handle this correctly, which adds up fast. I'm leaning toward removing the excess contribution before my extension deadline rather than risking ongoing penalties. One follow-up question - when you remove an excess SEP contribution, do you have to remove the entire contribution amount, or can you remove just the "excess" portion? In my case, since I have negative net SE income, would the entire $69K be considered excess?

Yes, in your situation with negative net self-employment income, the entire $69K SEP contribution would be considered excess since you don't have any eligible compensation to support any SEP contribution for the year. When you have zero or negative net earnings from self-employment, your maximum allowable SEP contribution is also zero. This means the full amount needs to be removed as an excess contribution if you want to avoid the 6% penalty. The removal process involves taking out both the original contribution amount plus any investment earnings (or minus any losses) that occurred while the money was in the SEP account. Your IRA custodian should be able to calculate the exact amount that needs to be withdrawn and provide you with the proper tax reporting forms. Just make sure you complete this before your tax filing deadline including extensions. If you filed for an automatic extension, you have until October 15th to handle this. After that deadline, you'll be stuck with the ongoing 6% penalty until the excess is corrected.