One of the most common questions that comes up with business owners looking to set up a retirement plan is: Can I contribute to both a SEP IRA and a solo 401k, and will doing so allow me to contribute more money per year?
Yes, in certain instance, if you have two separate businesses, you can essentially get two separate contribution limits. You can max out the solo 401k contribution limits and max out the SEP IRA contribution limits in the same year, essentially giving you double the contribution room. If you only have one business, you
However, the answer ultimately depends on two things:
- How your SEP IRA was set up.
- Whether you have one business or two separate businesses.
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It depends on how your SEP IRA was formed
If your SEP IRA was established using IRS Form 5305, then you cannot also set up a solo 401k. Form 5305 makes it so you cannot contribute to a qualified plan at the same time.
If you used Form 5305 to set up your SEP IRA, you cannot establish another qualified plan like a solo 401k. In the same way, if you have a solo 401k already, you cannot use Form 5305 to set up a SEP IRA.
In order to contribute to both plans, your plan provider must set up your SEP IRA using a prototype SEP document, which is essentially a modified version of Form 5305.
If your SEP IRA was not established using Form 5305, then you are allowed to have both plans, but your contribution limits and rules are different depending on whether you establish them under one business or two separate businesses.
If you have one business
If you have one business and want to open both a solo 401k and a SEP IRA, your total contributions to a SEP IRA and solo 401k are aggregated and must not exceed the limit of $61,000 for 2022 and $66,000 for 2023. If you’re over 50, you can apply catch up contributions as an employee to your solo 401k contributions.
NOTE: For you to be able to add on catch up contributions to the solo 401k, you must first max out your employee contributions of $20,500 for 2022 and $22,500 for 2023.
For example, if you’re under 50 in 2022, your contribution limit is $61,000 for both the solo 401k and SEP IRA. If you contribute $21,000 to your solo 401k, that leaves you with $40,000 in room remaining to make contributions to your SEP IRA.
Because the contributions are aggregated for both plans, there’s no real advantage to contributing to both plans. The solo 401k has more tax benefits, can come with a Roth option, and you have full freedom to invest in any asset class. In this case, it’s better to just prioritize maxing out one plan, the solo 401k.
Also read: Solo 401k Tax Advantages & Benefits
If you have two separate businesses
If you have two separate businesses, it may make sense to have both a solo 401k and a SEP IRA if one business has employees and the other has no employees. If you have two separate businesses, you can set up both a solo 401k and a SEP IRA, as long as the SEP IRA is not established using IRS Form 5305.
Doing so would give you double the contribution rooms, since they would be treated as two separate plans from two separate employers.
Essentially, your contribution limits for the year would be:
- $61,000 for the solo 401k ($67,500 if age 50+)
- Plus an additional $61,000 for the SEP IRA.
In total, your contribution limits for 2022 could be $122,000 if under 50, and $128,500 if you’re 50 years of age or older.
Solo 401k and SEP IRA contribution limits
Let’s go through a refresher on contribution limits for the solo 401k and SEP IRA.
The solo 401k and SEP IRA have the same contribution limits. However, a solo 401k also has catch up contributions for individuals who are at least 50 years old.
Contribution rules are different for the solo 401k and SEP IRA. With a solo 401k, you contribute as both the employer and employee. With a SEP IRA, you can only contribute as an employer.
Solo 401k contribution limits
- $61,000 for 2022
- $66,000 for 2023
Solo 401k contribution limits with catch up contributions
- $6,500 catch up for 2022 = $67,500 for 2022 if age 50+.
- $7,500 catch up for 2022 = $73,500 for 2023 if age 50+.
In a solo 401k, you contribute as both the employee and employer.
- Employees can contribute up to $20,500 ($27,000 if age 50+) for 2022 and $22,500 ($30,000 if age 50+) for 2023.
- Employers can contribute up to 25% of their compensation (20% if not incorporated).
- Total contributions for both sides must not exceed the yearly contribution limit.
SEP IRA contribution limits
- $61,000 for 2022
- $66,000 for 2023
No catch up contributions for the SEP IRA. Only employers can contribute to the plan; employees cannot make contributions to a SEP IRA. Employers can contribute up to 25% of their compensation (20% if not incorporated) up to the yearly contribution limit.
Also read: SEP IRA vs Solo 401k
Set up a new solo 401k in under 10 minutes
Contribute up to $69,000 and invest in any asset class with tax-free compounding†.
Anyone who makes money from a business, freelancing, or a side hustle is eligible, as long as you have no employees.
