Can You Really Have a SEP IRA and a 401(k)? – Avoid This Mistake + FAQs

Yes – an individual can have both a SEP IRA and a 401(k) at the same time, as long as IRS rules and contribution limits are followed.

This means you could be contributing to a 401(k) through an employer while also funding a SEP IRA for self-employment income in the same year. Federal law explicitly permits this dual retirement strategy.

SEP IRA vs 401(k): Understanding the Difference 

Before exploring how to use both plans, it’s crucial to know what each one is:

• SEP IRA (Simplified Employee Pension Individual Retirement Account): A retirement plan geared towards small businesses and self-employed individuals. Only the employer contributes to a SEP IRA – employees do not contribute from their salary. Contributions are tax-deductible for the business and go into each employee’s SEP IRA (which is basically a Traditional IRA).

• The contribution limit is up to 25% of an employee’s compensation (20% of net self-employment earnings) or a fixed cap ($66,000 for 2023; $69,000 for 2024), whichever is less. SEP IRAs are easy to set up and administer (often no annual filing), but they require equal percentage contributions for all eligible employees in a given year. There are no Roth or loan features, and no catch-up contributions for 50+.

• 401(k) Plan: A retirement plan typically offered by companies (but also available to self-employed as a Solo 401(k)). It allows employee salary deferrals (you contribute a portion of your paycheck pre-tax, or as Roth if available) and often includes employer contributions (like a matching or profit-sharing contribution). For 401(k)s, the employee deferral limit is $22,500 for 2023 (rising to $23,000 in 2024), plus an additional $7,500 “catch-up” if age 50 or above.

• Total contributions (employee + employer) for one employer’s 401(k) are capped at $66,000 in 2023 ($73,500 if you’re 50+ with catch-up; $69,000 in 2024). 401(k)s can have more features (Roth options, loans, varying investment options) and they require more administration (formal plan documents, nondiscrimination testing for employee plans, and annual filings like Form 5500 if not a solo plan).

In short: A SEP IRA is employer-funded and ultra-simple; a 401(k) involves both employee and employer funding and offers more flexibility but with added complexity. These differences set the stage for how you can leverage both at once.

Side-by-Side Comparison Table: SEP IRA vs 401(k)

Understanding these fundamentals helps clarify why having both is possible: the SEP IRA and 401(k) are governed by different rules and serve different needs. Now let’s see how federal laws allow them to coexist.

Federal Law Permits Both Plans (IRS Rules Explained) 📜

Federal regulations explicitly allow individuals to maintain a SEP IRA and a 401(k) simultaneously. The Internal Revenue Service (IRS) does not prohibit you from having multiple retirement plans.

IRS Publication 560 (“Retirement Plans for Small Business”) and official FAQs make it clear: you can maintain both a SEP and another retirement plan at the same time.

However, there’s an important caveat: if both plans are for the same employer (for example, you own a business and want to set up a 401(k) and a SEP for that one business), you must structure the plans correctly. The IRS provides a model SEP plan document (Form 5305-SEP), but Form 5305-SEP cannot be used if the employer has another retirement plan in place that year (other than another SEP). 🛑

Translation: A business can’t use the free generic IRS form to set up a SEP if it also sponsors a 401(k) – you would instead need to use an IRS-approved prototype SEP plan or an individually designed plan document. Prototype SEP plans (available from financial institutions) permit an employer to have another plan alongside the SEP. So yes, one business can have both a SEP IRA and a 401(k), but you’ll need the right paperwork (and a bit more administration to ensure compliance).

If the two plans are for different employers, it’s even more straightforward. For example, you work for Company X and participate in their 401(k), and you also run your own sole-proprietorship business that has a SEP IRA. In this case, federal law sees Company X’s 401(k) and your own business’s SEP as completely separate arrangements.

There is no prohibition on contributing to both in the same year. In fact, the IRS explicitly confirms: you can set up a SEP for your self-employed business even if you participate in an employer’s 401(k) at a second job. 🎉

IRS Contribution Limits When You Have Both a SEP IRA and 401(k)

Having two plans is legal, but you must respect the contribution limits set by law. Here’s how contributions work when juggling a SEP IRA and a 401(k):

• Employee Deferral Limit (401k) – This is a key federal limit to watch. If you have two 401(k) plans (say you change jobs, or you have a day job 401k and a separate Solo 401k for a side gig), the IRS aggregates your elective salary deferrals across all employers. For 2023, you can defer a total of $22,500 ($30,000 if age 50+) across all 401(k) and similar plans.

• So if you put $15,000 into your day job’s 401(k), you could only defer up to $7,500 more into any other 401(k)/403(b) plan that year. However, a SEP IRA does not involve employee deferrals – it’s purely employer contributions. This means your 401(k) salary deferral limit is unaffected by a SEP IRA. You can max out your $22,500 in the 401(k) and still get employer contributions in a SEP (since those aren’t “employee deferrals”).

• Total Annual Additions Limit (a.k.a. Section 415 limit) – The tax code also caps the total contributions made to your account in a plan. In 2023, the cap is $66,000 per employer plan (rising to $69,000 in 2024, not counting catch-up). If one employer is contributing to both a SEP and a 401(k) on your behalf, the combined contributions to both plans from that one employer cannot exceed the annual limit.

• Essentially, a SEP and 401(k) in one company are treated as one big plan for contribution limit purposes. For example, if your business pays you $100,000 salary, 25% of that is $25,000. You could allocate that $25,000 entirely to a SEP IRA, or split it (some to SEP, some as a profit-sharing in the 401k) – but you can’t contribute $25k to SEP and another, say, $40k to the 401k for the same person, because that would break the limit. The sum must stay ≤ $66k (for 2023).

• Separate Employers = Separate Limits – If the two plans belong to different employers (including yourself as a separate business), the contribution limits apply per employer. This is a crucial benefit: you might effectively get to double-dip on retirement savings.

• For instance, Your 9-5 job: you defer $22,500 into the 401(k) and your employer adds $5,000 match. Your side business: you contribute, say, $10,000 to your SEP IRA (deductible to your business). The 401(k) contributions don’t count against the SEP’s 25%-of-income limit, and the SEP contributions don’t count toward your day job 401k limits.

• There’s no coordination needed between unrelated employers’ plans. The only shared limit is the 401k deferral if you by chance also had a solo 401k – but in a SEP + day job 401k scenario, that’s not an issue since the SEP has no deferral feature.

• Example: Imagine you earn $150,000 at a corporate job and max out your 401(k) ($22,500 in 2023, plus you get employer matching). Separately, you have a consulting side business that nets $50,000.

• With a SEP IRA for your side business, you could contribute up to 20% of that net self-employment income (roughly $10,000) into the SEP. Result: you’ve socked away $22.5k + match in the 401k and an additional $10k in the SEP – significantly boosting your total retirement savings for the year, all legal and tax-advantaged 🎉. (If you tried to do this with two 401(k)s, you’d be limited on deferrals – that’s why the SEP+401k combo can be powerful for side hustlers.)

In summary, federal law not only allows multiple plans but provides clear guidelines on contribution limits.

The main points are: don’t exceed your deferral max across plans, don’t exceed the total annual max per employer, and use the correct plan setup if both plans are in one business.

Other Federal Rules and Considerations

If you maintain both a SEP and a 401(k) within the same company, be mindful of a few additional federal requirements:

• Top-Heavy and Nondiscrimination Testing: If you have employees (not just yourself), operating two plans means you must ensure one plan isn’t favoring you (as an owner) excessively over employees. A SEP by design gives the same percentage to all, which actually helps avoid discrimination issues in the SEP itself. But the 401(k) will have to undergo top-heavy testing (a check if the owners/key employees hold more than 60% of plan assets) and possibly provide minimum contributions to employees if it fails.

• When a SEP and 401k coexist, the top-heavy test generally considers both plans together. In practical terms, if you’re contributing generously to your own SEP and 401k, you may need to contribute for employees in those plans too. Federal law ensures you can’t use two plans to circumvent fairness rules. ✅

• Pro tip: Many business owners in this situation opt for a safe harbor 401(k) design (which requires giving employees a set employer contribution in the 401k) to automatically pass testing, on top of the SEP contributions or instead of them.

• ERISA Coverage: Both SEP IRAs and 401(k)s are subject to ERISA (Employee Retirement Income Security Act) protections, but in slightly different ways. A 401(k) is a qualified ERISA plan with strong federal protections (e.g., your 401k assets are generally shielded from creditors and lawsuits, and spouses have certain rights).

• A SEP IRA is funded by an employer, but ultimately it’s an IRA in your name – some ERISA requirements (like detailed reporting and fiduciary responsibilities) are relaxed for SEPs. Still, the contributions must follow the written plan terms.

• If you’re the business owner, remember that a SEP IRA means immediate vesting for any contributions (you can’t impose vesting schedules like you could in a 401k). But since you likely own the business, vesting is a moot point for your own contribution; it matters if you have employees.

• Tax Reporting: From a federal tax perspective, deductions for contributions go in different places. If you’re self-employed, SEP IRA contributions are deducted on your business schedule (and ultimately reduce your Adjusted Gross Income). 401(k) deferrals reduce your Form W-2 wages from an employer.

• There’s no double-counting issue as long as you follow the limits. When it comes to withdrawals down the road, both accounts’ distributions will be taxed similarly (unless Roth 401k money is involved).

• Also, each plan’s Required Minimum Distributions (RMDs) must be calculated separately when the time comes (age 73+ under current law). You can’t satisfy both plans’ RMDs from just one account – an important thing to remember when you have multiple retirement accounts.

The federal laws are the backbone: they say “Yes, you can do it,” and lay out how. Now let’s consider if any state-specific laws or nuances affect this dual-plan strategy.

State-Level Nuances: How Local Laws Come Into Play 🏷️

Retirement accounts are largely governed by federal law, but state laws can still affect your experience when you have a SEP IRA and a 401(k). Here are a few state-level considerations:

• State Income Tax Treatment: Your contributions to a 401(k) or SEP IRA are tax-deferred at the federal level, but individual states may or may not mirror that treatment. Most states follow the federal lead, meaning your contributions reduce your state taxable income as well. However, a few states have quirks.

• For example, New Jersey does not allow deductions for IRA contributions, and historically it taxed certain retirement plan contributions differently (though 401(k) deferrals are now generally excluded in NJ, while traditional IRA/SEP contributions might be handled via basis tracking).

• Pennsylvania taxes income differently and doesn’t allow deferral of income for IRAs/401(k)s (but then it doesn’t tax retirement distributions if certain conditions are met). The key is: check your state’s rules for retirement contributions.

• If you’re in a state with no income tax (🥳 hello Florida, Texas, etc.), this is a non-issue. If you’re in a state with unique tax rules (NJ, PA, etc.), know that having both accounts is still allowed, but the immediate tax benefit at the state level might differ for each type of contribution.

• Creditor Protection and Lawsuits: One often overlooked nuance is how well protected your retirement funds are under state law. A 401(k) is protected by federal law (ERISA) which generally shields it from creditors in bankruptcy and lawsuits (except IRS liens, marital division, etc.). SEP IRAs, being IRAs, fall under a mix of federal and state protection.

• In bankruptcy, federal law currently protects up to about $1-1.5 million in IRA assets (including SEP IRAs) by default. Outside of bankruptcy, state laws govern IRA creditor protection. Many states fully protect IRAs from creditors just like 401(k)s, but some states have limits or conditions.

• For instance, California will protect IRA funds only to the extent necessary for support (a somewhat subjective standard) outside of bankruptcy, whereas a 401(k) is fully protected by ERISA. Texas and Florida generally offer strong protection for both IRAs and 401(k)s.

• The bottom line: if asset protection is a concern, having both a 401(k) and a SEP might diversify your legal protection somewhat – but generally both are safe havens, with 401(k) having a slight edge due to ERISA. It’s wise to understand your own state’s stance on IRA protections if you have significant money in a SEP IRA.

• State-Mandated Retirement Programs: Some states have introduced laws requiring employers to provide retirement plans or join a state-run program. For example, California, Illinois, Oregon and others have auto-IRA programs (like CalSavers) that employers must use if they don’t offer their own plan.

• The good news is that if you already have a 401(k) or a SEP IRA plan set up for your business, you are usually exempt from the state program mandate. Both a SEP and a 401(k) count as qualified plans that satisfy the requirement. So, having either (or both) plans means you won’t have to enroll employees in the state’s retirement program.

• Just be sure to register your exemption if required. State laws don’t restrict you from having multiple plans; they just want to ensure employees have something available. So if anything, maintaining a 401(k) and a SEP might doubly ensure you’re compliant with such state mandates.

• State Tax Credits or Incentives: A few states offer incentives (tax credits, deductions) for small businesses that establish retirement plans, complementing the federal tax credit for new plans.

• While the federal SECURE Act gives tax credits for starting a new 401(k) or SEP, check if your state offers something extra. This isn’t directly about having both plans, but if you are considering adding a 401(k) when you already have a SEP, you might get a credit for starting the new plan. The rules and availability vary by state, but it’s worth investigating local programs for retirement savings incentives.

State laws won’t prohibit you from having both a SEP IRA and a 401(k) – that permission comes from federal law – but they can affect how those contributions are taxed and how well-protected your money is. Always consider consulting a local expert or CPA for specific state implications once you decide to utilize both accounts.

Now, let’s bring theory to life with some real-world scenarios where having both a SEP IRA and a 401(k) comes into play.

Real-World Scenarios: SEP IRA and 401(k) in Action 🌐

Understanding abstract rules is easier with concrete examples. Here are a couple of real-world scenarios illustrating how an individual might have both a SEP IRA and a 401(k), and the outcomes:

Scenario 1: W-2 Employee with a Side Business (401k at Work + SEP for Side Hustle) 🙌

Profile: Jane is an engineer at a mid-size company (full-time employee) and also runs a small consulting business on the side as a sole proprietor. Her employer offers a 401(k) and she contributes to it. She’s wondering if she can also open a SEP IRA to shelter some of her side income.

How it works: Yes, Jane absolutely can do this. She enrolls in her employer’s 401(k) and contributes, say, 10% of her salary to that plan, getting an employer match. Simultaneously, for her side consulting income, Jane sets up a SEP IRA through a brokerage.

At year’s end, once she knows her side-business net profit, she contributes 20% of that profit into the SEP IRA (which is the effective limit for self-employed after accounting for the self-employment tax adjustment).

Result: Jane is utilizing two separate retirement vehicles:

• From her day job 401(k), she’s getting the benefit of salary deferrals (which reduce her taxable W-2 income and possibly a Roth portion) plus any employer matching – free money 💰.
• From her side business via the SEP IRA, she’s boosting her retirement savings with pre-tax dollars that also reduce her business’s taxable income.

There’s no conflict because her side business is a different employer (herself). The contributions to her 401(k) don’t reduce what she can put in the SEP. She does need to remember that if she were to open a Solo 401(k) for her side business instead, her $22,500 deferral is shared with the day job – but by using a SEP, she avoids that issue entirely. In effect, Jane maximizes tax-advantaged savings by leveraging both plans: her total contributions far exceed what either plan alone would allow. This scenario is common and perfectly legal. It’s a great strategy for high-earning side hustlers who want to save more for retirement.

Note: If Jane’s side business grows and she hires employees for it, she’ll have to contribute to SEP IRAs for them too (at the same percentage as herself). At that point, she might re-evaluate whether a 401(k) plan for the business (perhaps a safe harbor 401k) would be more suitable than the SEP. But as a one-person business, a SEP is straightforward and employees at her day job aren’t affected by it at all.

Scenario 2: One Business, Two Plans (SEP and 401k in the Same Company) 🤯

Profile: XYZ Corp is a small design firm owned by Jack. He’s the sole owner and has a few employees. Jack likes the simplicity of the SEP IRA – he’s been contributing 15% of compensation for himself and his employees each year. However, he learns about the benefits of a 401(k) (for example, employees could save on their own, and he could do a larger total contribution for himself with combined employee deferral + profit sharing). He is considering maintaining the SEP for now but also adding a 401(k) so that his employees can defer from their salaries and he can potentially contribute more.

How it works: First, Jack must ensure his SEP plan document allows another plan. Since he started with the IRS Form 5305-SEP (which forbids another plan), he would need to switch his SEP to a prototype SEP plan document. He contacts his financial institution to update the plan document accordingly. Now XYZ Corp establishes a 401(k) plan as well.

Contributions:

• Jack decides to keep funding the SEP at 15% of pay for everyone this year (because the SEP has been a nice perk and is already in his budget).
• Additionally, he sets up the 401(k) with a feature that allows employee deferrals. All employees, including Jack, can contribute from their salaries. Let’s say Jack defers the max $22,500 for himself, and a couple of employees defer a portion of theirs. Jack also decides to contribute a small employer match in the 401k (or maybe a profit-sharing contribution at year-end) to further reward employees.

Limits check: Because both plans are in the same company (XYZ Corp), Jack must make sure the total contributions for any individual don’t exceed the limits. Jack’s own compensation is $120,000. Under the 15% SEP formula, he’s contributing $18,000 to his SEP-IRA. In the 401(k), he defers $22,500 from salary. Is this allowed? Yes, but with caution: The $22,500 is an employee deferral and does not count toward the 25%-of-comp limit for the SEP. However, the IRS’s overall 415 limit says Jack’s combined contributions from XYZ Corp (employee + employer) can’t exceed $66,000. Right now, he has $18k (SEP) + $22.5k (401k deferral) = $40.5k, which is under $66k, so it’s fine. If he wanted, he could even add another employer profit-sharing contribution in the 401k for himself of up to $25.5k and still be at the $66k total cap. The employees are also monitored: each employee’s SEP % plus any employer contributions in the 401k should not exceed the cap relative to their pay. Given the SEP is uniform %, likely no one will exceed the cap unless someone’s high paid. The deferrals employees make don’t affect the SEP at all.

Outcome: Jack successfully runs two plans in one year. His employees got the 15% SEP contribution and also had the opportunity to defer into the 401k (plus receive a small match). Jack himself managed to put away a lot: $18k via SEP + $22.5k via 401k deferral + possibly more via 401k profit sharing, all tax-advantaged. Come tax time, XYZ Corp will deduct the SEP and 401k employer contributions as business expenses. The employees are thrilled to have a 401k option for saving (SEP was invisible to them except getting a deposit once a year), and Jack likes the flexibility. Administration: He did incur more complexity – now he has to file a Form 5500 for the 401k each year and ensure compliance testing on the 401k. The SEP remains straightforward. He’ll also monitor top-heavy status: with two plans, if Jack as owner ends up with more than 60% of total assets in these plans, the 401k might require a minimum contribution for employees (the SEP contribution likely already satisfies a lot of that). He works with a plan advisor to ensure all is well.

Is this common? Honestly, most small businesses choose one plan or the other rather than running both. It’s more common to see Scenario 1 (side business + day job) than a single business maintaining two parallel plans. In Jack’s case, he might eventually roll the SEP into the 401k plan and have just one plan for simplicity, especially if cost and paperwork are issues. But it illustrates that it’s possible to have both concurrently if there’s a reason to do so. This scenario might also happen in a transition year (e.g., you had a SEP for half the year, then started a 401k mid-year; both existed in the same year).

Scenario 3: Solo 401(k) or SEP – Or Both? 🤔 (Maximizing Self-Employed Savings)

Profile: Lina is a freelance graphic designer with no employees. She’s trying to decide between a SEP IRA and a Solo 401(k) for her business. A creative thought occurs: could she possibly have both a Solo 401(k) and a SEP IRA for herself to turbocharge her savings?

Reality check: While she could open both, it generally doesn’t give her extra room beyond what one good plan would. Since Lina’s business is a single entity, the contributions to both would be limited by her one employer (herself) limit. For example, with $80,000 of profit, her max “annual additions” to retirement (whether via SEP, 401k, or combined) is ~$16,000 (20% of net profit) as employer plus, with a Solo 401k, she could also do $22,500 employee deferral. If she only had a SEP, she’d be limited to ~$16k.

If she only had a Solo 401k, she could do $22.5k + ~$16k = ~$38.5k – which is much higher. If she tried to do both Solo 401k and SEP, she wouldn’t get to exceed that ~$38.5k combined, because the IRS views it as one pot of contributions from one business. Moreover, using a SEP alongside a 401k when it’s the same one-person business would mean she can’t use the simple Form 5305-SEP; she’d need a prototype. It’s extra complexity for no gain in limit.

Outcome: Lina decides not to maintain two plans for herself alone. Instead, she opts for the Solo 401(k) as it gives her higher contribution potential at her income level. She likes that she can also make Roth contributions in the Solo 401k and even take a loan if needed. She may still open a SEP IRA in the future if she ever had a second, unrelated business or became someone’s employee while still self-employed (back to scenario 1 logic). But for one business, one plan is sufficient.

This scenario underscores a practical point: just because you can have both doesn’t mean you always should. Often, one plan will meet your needs. In cases where you have multiple income streams or legacy reasons (e.g., you had a SEP and now want a 401k), you might end up with two – and that’s fine, as long as you follow the rules.

Now that we’ve looked at scenarios, let’s sum up the advantages and disadvantages of having both a SEP IRA and a 401(k).

⚖️ Pros and Cons of Having Both a SEP IRA and a 401(k)

Is maintaining two retirement plans simultaneously a good idea for you? Consider these pros and cons:

As you can see, having both a SEP IRA and a 401(k) offers powerful opportunities to save and flexibility to tailor to your needs, but it also carries additional responsibilities. If you have separate sources of income (like an employed job and a side gig), most of the cons are minimal – it’s generally straightforward. If you’re considering two plans in one business, weigh the pros (higher savings, features) against the cons (complexity, cost).

Often, people start with a SEP IRA when their business is very small because it’s so easy. As their business grows or their needs change, they might “graduate” to a 401(k) plan. In some cases, they might keep the SEP for a transition period or special purpose while the 401k is introduced. Others with a stable day job and a profitable side business find the SEP+401k combo ideal indefinitely.

Key takeaway: You can have both – but consider whether you need both. If one plan can accomplish your goals, simplicity might be your friend. If each plan serves a distinct purpose and maximizes your benefits, then go for it, just stay organized.

Next, let’s ensure you steer clear of some frequent mistakes people make with these accounts.

🚫 Avoid These Common Mistakes

When dealing with multiple retirement accounts like a SEP IRA and a 401(k), people sometimes run into pitfalls. Here are common mistakes to avoid:

• Overstepping Contribution Limits: The most frequent error is contributing too much. For example, double-counting your 401(k) deferral limit (trying to put $22,500 into each of two 401k plans – which is not allowed), or forgetting that a single business’s contributions to SEP + 401k together can’t exceed the annual cap.

• Avoidance: Track your contributions carefully. If you have a 401(k) at work and a Solo 401k, remember the elective deferral is shared. If you have one business with two plans, add up all contributions to ensure you’re under the limit. When in doubt, consult a tax advisor or use IRS worksheets for Pub 560 that help calculate allowable contributions.

• Using the Wrong Plan Document: A subtle but serious mistake is for business owners with a SEP to add another plan without changing the SEP document. If you set up your SEP IRA with Form 5305-SEP, that form explicitly prohibits having another plan in the same year. Ignoring this can jeopardize the qualified status of your SEP.

• Avoidance: If you plan to add a 401(k) (or any plan) alongside your SEP in the same business, contact your financial institution to adopt a prototype SEP plan or have a custom plan drawn up. This way, your SEP remains legal while coexisting with a 401k.

• Neglecting Plan Testing and Duties: For those with employees, implementing multiple plans means multiple compliance tasks. You might forget that the 401(k) needs a top-heavy test or that you have to give notices if it’s safe harbor, etc. Or you might not realize that the SEP contribution could affect the 401k’s top-heavy status.

• Avoidance: Work with a retirement plan administrator or third-party administrator (TPA) who can run required tests and guide you. If you’re solo (no employees), lucky you – no testing needed – but still remember to file the 401k’s Form 5500 if required (once you have >$250k in a Solo 401k, for example).

• Failing to Include Eligible Employees: A common error, especially with SEP IRAs, is accidentally excluding someone who should get a contribution. With two plans, this could be even more confusing. For instance, you start a 401(k) mid-year with certain eligibility rules and forget that an employee who didn’t get a SEP contribution earlier might need something.

• Avoidance: Carefully review eligibility requirements for both plans. SEP IRAs often use the 3-of-5 rule, so even part-timers from years past might become eligible. 401(k)s usually allow entry after one year at latest. Ensure no one is overlooked – it’s both an IRS requirement and the right thing to do for morale.

• Not Coordinating with Your Tax Professional: Sometimes people set up a SEP IRA (often at the last minute during tax season) and also contribute to a 401k at work, but their tax preparer may not be fully in the loop about both. This can lead to errors in deduction claims or missing out on deductions.

• Avoidance: Always inform your accountant or tax advisor about all retirement plans you’re participating in. They can help ensure contributions are reported correctly and maximize your tax benefits without breaching limits.

• Assuming SEP is Same as Personal IRA for Limits: People might think “I contributed to a SEP IRA, so I can’t contribute to my own Traditional IRA for that year” – which is incorrect. A SEP IRA contribution doesn’t impact the $6,000/$7,000 personal IRA contribution limit because SEP is considered an employer plan. Conversely, some might open a “SEP IRA account” and mistakenly try to contribute regular IRA contributions into it outside of employer contributions.

• Avoidance: Keep clear in your mind (and records) what each contribution is. You can still contribute to a Traditional or Roth IRA personally even if you max out a SEP and 401k, as long as you have the income and meet any Roth income limits. The SEP IRA’s limit is separate from the personal IRA limit. Don’t mix up the two types of contributions in the same account without proper designation.

🗨️ Frequently Asked Questions (FAQs)

Q: Is it possible to have a SEP IRA for my 1099 side hustle and a 401k with my W-2 job in the same year?
A: Yes. You can use your day job’s 401(k) and also open a SEP IRA for your side-business income. They’re separate plans. Just remember that your 401(k) salary deferral limit is shared across any 401k/403b plans.

Q: Can I contribute to a SEP IRA even if I have maxed out my 401(k) for the year?
A: Absolutely. Maxing out your 401(k) (employee deferrals) doesn’t prevent SEP contributions because SEP contributions are employer-based. You can contribute to the SEP on top of your 401k, up to the SEP’s own limits.

Q: Do I need separate businesses to have a SEP and a 401(k)?
A: Not necessarily. You can have one business sponsor both a SEP IRA and a 401(k) in the same year, but the SEP must use a prototype or custom plan (not the standard IRS form). If you do have two separate businesses (or a job and a business), it’s even easier – each can have its own plan.

Q: Should I have both a SEP IRA and a 401(k), or just one?
A: It depends on your situation. If you have both self-employment income and a job, having both can maximize your retirement savings 👍. But if it’s all for one business, many people pick one plan that suits them best to keep things simple. Consider the administrative effort versus the extra savings or features you get.

Q: Are there any tax pitfalls to watch out for with both plans?
A: The main pitfall is contributing over the allowed limits – which can trigger tax penalties. Also, if both plans are in one business, use the correct SEP setup and do required testing. But with proper planning, these pitfalls are avoidable.

Q: Can I have a Roth IRA on top of a SEP IRA and 401(k) as well?
A: Yes. A Roth IRA is a separate personal retirement account. You can still contribute to a Traditional or Roth IRA (within the IRA annual limits) even if you’re contributing to a SEP and 401(k). Just note that your ability to deduct a Traditional IRA or contribute to a Roth IRA may be affected by your income and the fact you’re covered by employer plans – but having the accounts themselves is fine.

Q: If I have both a SEP and 401k, how do Required Minimum Distributions (RMDs) work?
A: After you reach the RMD age (73 under current law, gradually rising to 75 in coming years), you’ll need to calculate RMDs for each account separately. For IRAs (including SEP IRAs), you can take the total IRA RMD from any one (or more) of your IRAs if you prefer. But 401(k) RMDs must be taken from each 401(k) plan account individually. Having both means you’ll juggle two calculations, but it’s manageable. Always ensure to withdraw at least the required amount from each 401k and in total from your IRAs to avoid penalties.

Q: What happens if I accidentally contributed too much to my 401(k) or SEP IRA?
A: If you catch an excess 401(k) deferral (over $22,500, for example) before the IRS deadline (usually April 15 of the next year), you can have the excess refunded to avoid double taxation. For an excess SEP contribution (above 25% or above the dollar cap), it’s considered an excess IRA contribution – you should withdraw it (plus earnings) when discovered to avoid a 6% excise tax per year on the excess. It’s not the end of the world, but you’ll want to correct it promptly. This underscores why tracking contributions in both plans is important.