SEP AND Individual 401k

[asmadking]

For years, Turbotax home and business has been guiding me toward being able to contribute to BOTH a SEP and an individual 401k as long as I don't exceed specified limits. Now, my financial institution is saying that I have to pick one. I've already filed my return saying that I would do both. What gives? Who's right? I'm in the middle of slogging my way through the IRS pub 560, but it's horribly written, vague and tedious, and I'm not seeing much clarity in it. Any help?  

[DavidD66 · Accepted solution]

You can have both a SEP IRA and a Solo 401k plan and contribute to both plans.  This is confirmed in IRS Publication 560, Chapter 2, page 6 “More than one plan”.  However, the combined contribution for both plans (the SEP IRA and Solo 401k) may not exceed the annual contribution limit for the year:  For 2022 - $61,000, or 25% of compensation from the business, whichever is less.  

[asmadking]

That's what I have always thought. The rep must have misunderstood my intentions. Thanks for confirming.

[dmertz · Accepted solution]

The answer provided by @DavidD66  requires modification.  If your SEP plan uses Form 5305-SEP for you plan agreement as many (if not most) do, you are not permitted to simultaneously maintain both a SEP plan and any other retirement plan (stipulated in the instructions for Form 5305-SEP).  You are only permitted both if your SEP plan uses a prototype agreement that allows for both.

There is generally no benefit to maintaining both because, with both, the same employer contribution that could be made to a SEP plan can be made to the 401(k) plan instead.

Also, for someone who is self-employed, the maximum employer contribution is 20% of net earnings (because the employer contribution effectively reduces net earnings from which the maximum employer contribution is  determined).  Net earnings are net profit minus the deductible portion of self-employment taxes.