Can I Have a SEP IRA and a 401(k)?
Discover if you can manage both a SEP IRA and a 401(k) for retirement. Learn about their interplay, contribution rules, and tax considerations.
Retirement planning involves understanding various savings vehicles to maximize financial security. Different plans offer distinct features and benefits, allowing individuals to tailor their approach to their unique financial circumstances. Navigating the rules for these accounts can help optimize contributions and tax advantages, contributing to a more robust financial future.
Understanding SEP IRAs and 401(k)s
A Simplified Employee Pension (SEP) IRA is a retirement plan often utilized by self-employed individuals and small business owners. Contributions to a SEP IRA are made solely by the employer, or by the self-employed individual acting as the employer. These contributions are a percentage of compensation, offering a flexible way for business owners to save for retirement.
In contrast, a 401(k) is an employer-sponsored retirement plan typically offered to employees. These plans usually allow employees to contribute a portion of their salary directly, known as elective deferrals. Employers may also contribute to a 401(k) through matching contributions or profit-sharing.
Holding Both SEP IRAs and 401(k)s
Individuals can have both a SEP IRA and a 401(k) simultaneously. This often occurs when someone is employed by a company offering a 401(k) and also earns self-employment income or owns a separate small business. In these cases, contributions can be made to the 401(k) through their employer and to a SEP IRA based on self-employment income.
These two retirement vehicles are distinct. Maintaining both accounts allows for increased retirement savings flexibility for individuals with diverse income streams. Concurrent participation is permissible as long as the plans are associated with separate sources of earned income.
Contribution Limits and Coordination
Understanding annual limits and their interaction is important when contributing to both a 401(k) and a SEP IRA. For 2025, the 401(k) employee elective deferral limit is $23,500. Individuals aged 50 and older can contribute an additional $7,500 in catch-up contributions. Those aged 60 to 63 may contribute an enhanced catch-up amount of $11,250, if their plan allows.
SEP IRA contributions for 2025 are limited to the lesser of 25% of an employee’s compensation or $70,000. For self-employed individuals, this 25% is calculated on net earnings after deducting one-half of self-employment taxes and SEP contributions. The maximum compensation considered for these calculations is $350,000 for 2025.
The Internal Revenue Code Section 415(c) limit governs total annual additions to defined contribution plans. For 2025, this overall limit is $70,000. All employer contributions, including those to a SEP IRA for self-employment and those by an employer to a 401(k), are aggregated under this limit.
Employee elective deferrals to a 401(k) are treated separately from SEP IRA contributions for aggregation. However, if both the 401(k) and SEP IRA are sponsored by the same business, total contributions to both plans are combined and subject to the $70,000 overall limit. This aggregation ensures the total amount contributed across all defined contribution plans does not exceed the statutory maximum.
Tax Implications of Having Both
Contributions to a traditional 401(k) and a SEP IRA are generally tax-deductible, reducing taxable income. Funds within both account types grow on a tax-deferred basis, meaning earnings are not taxed until withdrawn. This allows investments to compound without immediate tax erosion.
Upon retirement, distributions from traditional 401(k)s and SEP IRAs are taxed as ordinary income. Required Minimum Distributions (RMDs) from both account types begin when the account owner reaches age 73. Failure to take these distributions can result in penalties.
SEP IRAs are exclusively pre-tax accounts, but some 401(k) plans offer a Roth option. Contributions to a Roth 401(k) are made with after-tax dollars, but qualified distributions in retirement are tax-free. This contrasts with the pre-tax nature of SEP IRA contributions, offering different tax planning opportunities.