Can I contribute to a SEP IRA and 401(k) simultaneously?
Question: If I have self-employment income from a separate business and also am employed by an employer that offers a 401(k) plan, can I participate in the 401(k) plan and still contribute to my SEP IRA?
Answer: Yes – As long as the SEP IRA plan and the 401(k) plan are offered by separate companies. If you don’t own the company that pays you a W-2, you can participate in both plans. Even if you participate in an employer’s retirement plan at a second job, you are allowed to set up an SEP plan if you have self-employment income through a business. You can learn more via the IRS Frequently Asked Questions (FAQs) for SEP plans. However, your contributions are still subject to some limitations.
Let’s take a further look at the limitations.
For an SEP plan, your contribution each year cannot exceed the lesser of 25% of your compensation or $57,000 for 2020. Catch-up contributions do not apply to employer contributions. The maximum amount of self-employment compensation that applies for 2020 is $285,000. For self-employed individuals, the amount of compensation used for these purposes is your net earnings from self-employment less the deductible portion of self-employment tax, and the amount of your own retirement plan contribution deducted on the 1040. These limits not only apply to an SEP plan. They are the total limits for all defined contribution plans.
For a 401(k) plan, the 2020 limit is $19,500, plus a $6,500 catch-up contribution for those individuals over age 50. If these limits are less than a participant’s compensation in a year, the contributions are limited to 100% of compensation.
What if the SEP plan and the 401(k) plans are offered by two different employers?
If the SEP plan and the 401(k) plan are offered by two different employers (i.e. yourself, if self-employed, and by an unrelated business), an individual can participate in both the SEP and the 401(k) plan, up to the limits for each plan. Contributions to a SEP plan are not reduced by contributions to the 401(k) plan.
What if they are offered by the same business?
However, if both plans are offered by the same business, then the individual’s contributions to both plans, in total, are limited to the lesser of $57,000 or 25% of the net earnings from self-employment, excluding catch-up contributions from the $57,000 limit, and salary deferrals from the 25% limit.
If you have self-employment income from a side business in addition to W-2 income from employment, consider contributing to a SEP plan and a 401(k) plan, if available. Doing so will maximize your retirement savings. Contact one of our team members today for more information.
Reference: IRS Publication 560 and IRS.gov FAQs on retirement plans