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Making Contributions to Both a Solo 401K and a SEP IRA

Simplified Employment Pensions are a very similar type of retirement account to solo 401ks as both are meant for those who are self-employed, however there are a few differences between the two. A SEP IRA allows you to make a contribution of up to $52,000 and is extremely easy to set up with very low administrative responsibilities. However, you may have less tax deductions compared to an individual 401k. On top of this, those that are past the age of 50 will not be granted a $5,500 contribution catch-up like there is with an individual 401k. On the other hand, an individual 401k will also allow you to contribute $52,000. You can potentially make larger retirement contributions with this type of account compared to a SEP IRA, and can take out up to 50% of the total amount in the account as a loan. The disadvantage of 401ks however is that you may have more administrative responsibilities and fees compared to that of a SEP IRA. Many people wonder if they can contribute to both a SEP IRA and a 401k if they are self-employed, but also have a regular job. The answer to this question is yes, however there may not be a benefit in doing so.

Tax Advantages of a SEP IRA

The tax advantages that come with a SEP IRA are very similar to that of a 401k, as you can deduct all of your contributions and the earnings that you make will be tax deferred. However, you will still be taxed for any withdrawals that you make from this type of account.

Does Contributing to Both Accounts Have Benefits?

You can contribute to both a solo 401k account and a SEP IRA account, however due to the fact that both are very similar accounts, and contributing to one will limit the amount you are able to put in the other, there really is no benefit in doing so. If you're an employee of a company that has SEP IRAs then the contributions that you make will count directly toward your IRA contribution limit not just the limit for the defined contribution plan. For instance, if you contribute $5,000 to a SEP IRA and are self-employed then you are able to make contributions to both plans, however you have to specify exactly how the contribution is supposed to be treated. Any money that your employer puts into your SEP IRA on your behalf cannot be over 25% of the compensation that you make. If you are self-employed then you can't contribute over 20% of your self-employment earnings. On top of this, neither you nor your employer is able to contribute over $51,000 to a SEP IRA account.

Total Contribution Limit on Both Your SEP IRA and 401k

The IRS puts a limit on the amount that you're able to contribute to a SEP IRA and solo 401k plan due to the fact that both accounts offer very similar benefits that they don’t want to see duplicated. The limit in total is $51,000 if you are younger than 50 years old, and $56,000 if you are over 50. This limit counts both the contributions made to your SER IRA from your employer as well as your own contributions and also the contributions made to your 401k plan. For instance, if you are under the age of fifty and are self-employed, but also have decided to open a solo 401k plan then if you contribute $15,000 to your solo 401k then you can only contribute $36,000 to your SEP IRA.

Bottom Line

Although you can contribute to both plans without a problem, there isn't a great benefit of doing so due to the fact that both SEP IRAs and 401k plans have a specific limit on the amount that both you and your employer can contribute. This means that even if your employer offers you an employee pension retirement arrangement on top of your solo 401k or you are self-employed and are considering opening both types of retirement account then there may not be a benefit in contributing simultaneously as they are subject to having cumulative limits on contributions. You would be better off contributing to two different types of investment accounts.