Contributing to a SEP-IRA (or solo 401k) while also maxing out employer sponsored 401k and Roth IRA

[emmaelotter]

Hello, I've filed my taxes already but have a question regarding retirement account contribution limits if I am both self employed and have a w-2 job. I max out my employer sponsored 401k and max out my Roth IRA. I have heard I can open a SEP-IRA or a solo 401k, but I can't find a clear answer on how much I could contribute to one of these accounts given I already max out the Roth and 401k at my work. I am thinking of opening one now and contributing before the deadline to get some money back as I paid quite a bit in taxes, and heard this can lower my taxable income.

QUESTION: Could someone please clarify if, given the fact im maxxing my Roth and 401k at my work, opening a SEP-IRA or solo 401k could reduce my taxable income? If so, which one would be best recommended for a sole proprietor?

For context, I also had to withdraw some roth IRA contributions since I was over the income limit. I have seard the SEP is simpler to set up so I'm leaning towards that. Thank you so much in advance!

[ReneV4 · Accepted solution]

Yes. You can open a self-employed retirement account to reduce your taxable income, even if you’ve already maxed out your W-2 401(k) and Roth IRA.

However, because you have already reached the $23,500 employee contribution limit for 2025 at your day job, any additional contributions to a self-employed plan must be made as the employer. 

As a sole proprietor, you act as both the employee and the employer. These employer contributions do not share a limit with your W-2 employee deferrals, allowing you to "stack" your total retirement savings.

Choosing the Right Plan

You have two primary options, both of which can still be established for the 2025 tax year if you act by April 15, 2026 (or October 15, 2026, if you filed an extension).

1. The SEP-IRA (Best for Simplicity)

• This is the easiest option and can be opened instantly online at most major brokerages.
• Contribution Limit: You can contribute the lesser of $70,000 or roughly 20% of your net self-employment earnings (calculated as net profit minus the deductible portion of your self-employment tax).
• The Catch: You mentioned withdrawing some of your Roth contribution. If you plan to use the "Backdoor Roth IRA" strategy in the future, having a balance in a SEP-IRA triggers the Pro-Rata Rule. This means the IRS will tax a portion of your Roth conversion based on the total value of all your IRAs.

2. The Solo 401(k) (Best for Long-Term Planning)

• Slightly more paperwork and usually requires an Employer Identification Number (EIN). Under the SECURE Act 2.0, you can now establish this retroactively for the 2025 tax year up until your tax filing deadline
• Contribution Limit: Since your employee bucket is full, you are limited to the same 20% employer profit-sharing contribution as the SEP-IRA
• The Advantage: A Solo 401(k) does not trigger the Pro-Rata Rule. This keeps the door open for tax-free Backdoor Roth IRA conversions in the future

Next Steps

To claim this deduction for 2025 since you have already filed, you will need to:

• Open and fund the account by the tax deadline
• File an amended return (Form 1040-X) to report the contribution and receive your tax refund

[emmaelotter]

Thank you so much! That helps a lot to confirm what I've seen. It looks like a solo 401k might be the best option. Can I file an extension, and then be able to contribute/establish this solo 401k before the extended deadline in october? Just in case I can't get an EIN/obtain the solo 401k account in time before the 15th. 

One more question, if I do a SERP Ira, and later want to not have that interfere with a backdoor roth, is there a way to convert or roll this over so it doesnt ruin that possibility? I have seen online that could be an option.

Thanks again!

[AmyC]

Yes, you can file an extension to give you time to establish and fund. The EIN takes 2 minutes on the IRS website. Save your welcome letter.

You can roll over (transfer) a SEP-IRA balance into a Solo 401(k). Once the money is inside the 401(k), it is "invisible" to the IRS for the purposes of the Pro-Rata Rule. Unfortunately, not all SOLO 401(k) providers allow it.

[emmaelotter]

Ok, thank you so much!