Can I contribute to both SEP and Roth 401K as a small business owner with no employee? What is the maximum amount I can contribute?

[mww42]

I want to have both SEP & Roth 401K. In Turbotax, when I checked "max contribution" box for SEP, it showed -$7736 on Retirement Deduction Results page, but when I put in same amount manually, it does not. Does it mean I cannot contribute to both SEP IRA and Roth 401K, or I contributed too much to one of them? I am a small business owner with no employee and have about $15000 income. I was going to contribute $12000 to Roth 401K and $3000 to SEP.  I understand that that I am able to have both. Please help. Thank you.

[MichaelL1 · Accepted solution]

Yes. You can make contributions to both a SEP and a Solo 401K  Plan.

There are limitations on both however based on a percentage of your income you are reporting on the Sch C business.

The employer side of the solo 401(k) contribution is limited to 25% of total business income for the year.

SEP accounts are less well-known and are generally used by self-employed individuals and small businesses. SEP stands for "simplified employee pension," and all contributions are considered to be from the employer. The overall contribution limit is $54,000 for the year or 25% of the employee's compensation -- whichever is less. 

Calculating SEP IRA contributions for self-employed individuals is tricky, as the salary of the account holder is calculated after the contribution is made. Not including limits, the calculation is 18.587045% (approximately 18.6%) of net profit

The link below is an article on this very subject you may want to look at.  It does have overall dollar amounts for 2016, but it is the percentage of the profits that is impacting you and not the overall dollar limit.

https://www.fool.com/knowledge-center/can-a-person-have-a-401k-and-sep-ira-simultaneousl.aspx

[titanj]

Michael - My husband and I have an LLC (partnership) with SE income from services. I want to set up a SEP IRA for 2019 (first year in business) and contribute for both of us and the one full-time employee. In 2020, the only employee is part-time, so I'd like to set up a Solo 401k to contribute for myself and my husband. Can I continue to maintain the SEP IRA for the part-time employee? And if so, would I have to make the same percentage employer contributions (as the part time employee) to the SEP IRA for myself and my husband, while making the elective deferrals to the Solo 401k?

Appreciate your insight.

[dmertz]

A business is not permitted to maintain a SEP plan based on the Form 5305-SEP plan agreement and another qualified retirement plan at the same time.  To be able to maintain both the SEP plan would have to use a prototype SEP plan agreement other than Form 5303-SEP that explicitly permits both plans to be maintained simultaneously.

There is generally no point to having a SEP plan and a solo 401(k) plan for the same year.  The limit on employer contributions is the same to either plan, so whatever would be the employer contribution to the SEP plan (all SEP contributions are employer contributions) could be made to the 401(k) plan instead.  The limit on total employer contributions is the same no matter how the employer contributions are split between a SEP plan and a solo 401(k).

titanj, yes you can include your part-time employee and, in fact, you must include the employee if the employee meets the eligibility requirements established in the SEP plan agreement.  Your SEP plan must, at a minimum, make employees who have performed services in at least 3 of the last 5 years, are at least age 21, have earned at least $450 during the year and are not covered by a collective bargaining agreement be eligible to participate, but you can adopt less restrictive eligibility requirements, specified in your SEP plan agreement.  Your contributions for each participant must be calculated using the same base contribution rate.  (The self-employed must use a special adjustment calculation on the base rate.  For example, adjusted rate for the self-employed is 20% when the base rate is 25%.)

You cannot have a Solo 401(k) plan if you have eligible employees.  You would need a regular 401(k) plan (perhaps a safe harbor 401(k) plan) instead.