Can You Have a Sep Ira and a 401k

SEP (Simplified Employee Pension) plans are a blazon of retirement plan, similar to a 401(yard), for modest businesses and self-employed individuals.

SEP IRAs are cheaper and simpler to set up and manage than 401(grand)southward. Every bit a consequence, they are an attractive selection for single-employee owner-run businesses. Their main downside is that they provide fewer features than 401(k) plans. Most notably, SEP IRAs don't allow a Roth selection.

SEP IRAs are a revenue enhancement-deferred savings vehicle, meaning that contributions to the programme are deducted on your taxes at present and distributions are taxed when yous withdraw the assets. Like other tax-deferred savings, SEP IRAs are subject to Required Minimum Distributions in the year y'all turn seventy 1/2 years old.

You tin take and participate in both a SEP IRA and 401(k) program. The IRS very conspicuously says, "Yes, you lot can fix a SEP for your self-employed business even if you participate in your employer's retirement plan at a second job."

But if y'all have both a SEP IRA and a 401(yard) plan, can you lot still contribute to both? The short answer is yes.

There are 2 different contribution limits at play when information technology comes to employer-sponsored retirement plans.

The first is the employee contribution limit. This is the one most people know and reflects how much salary an employee is allowed to defer into the programme. This is called the "basic elective deferral limit" by the IRS. Currently in 2016, the limit is $18,000.

This employee contribution limit is the amount y'all can defer to all of your plans, pregnant the employee contribution limit is per person non per plan.

This contribution limit applies to 401(thousand), 403(b), and SIMPLE plans. SEP IRAs actually practise not permit elective bacon deferrals.

The second contribution limit is the overall contribution limit and is the amount of total annual contributions allowed to "all of your accounts in plans maintained by one employer." Since this limit is college, the employer is the only i who tin can cause an employee'southward contributions to reach their overall limit. As a result, information technology is easiest to retrieve of this every bit the employer contribution limit. Since your employer would have no style of knowing what other employers of yours are doing, this is a per-plan limit.

This employer contribution limit varies based on the type of plan. For both 401(thousand)s and SEP IRAs, the overall contribution limit is $53,000 for 2016.

For SEP IRAs though, there is one more than cord attached. Yous can contribute upwards to $53,000, but your contribution is limited to 25% of your full compensation from the task with the SEP plan. This means that you would have to make $212,000 to legally contribute the maximum to your SEP IRA. You can read more nigh that in our article "How Much Can I Contribute To My SEP IRA?"

This overall contribution limit includes employee elective deferrals. That means that if the employee takes advantage of their $xviii,000 contribution, then the remaining amount of the maximum contribution limit for the employer to utilise is only $35,000. This affects 401(g) plans, where employee deferrals are allowed, but does not affect SEP IRAs, where no such deferrals are permitted.

Assuming that you are the owner of a business concern with a SEP IRA and an employee of a different, unrelated business organisation that has a 401(1000) plan, this means that the maximum y'all tin can contribute to your retirement plans is $71,000. That comes from:

1. An $18,000 employee salary deferral to your 401(k), ideally to your Roth 401(yard)
2. A $53,000 employer contribution to your SEP IRA, bold y'all make over $212,000 from your SEP IRA business

Your 401(k) plan employer may as well contribute another $35,000 to your 401(thousand) plan, to bring the total upwardly to $106,000 of employer-sponsored retirement plan savings, but it'south your employer's decision, not yours.

Similar all employer plans, you can contribute to your employer program(s) and too contribute to an IRA, like your Roth IRA. This means that you lot tin can save an additional $5,500 in your Roth IRA, for a m full of $111,500 of retirement savings.

This is good news for people trying to go a new business launched but can't all the same requite upwards their chief job.

With high contribution limits, SEP IRAs offer a powerful way to provide for your own retirement in the aforementioned way that 401(k) plans practise. Don't let confusion virtually your by savings continue y'all from saving for your future now.

Photo used here under Flickr Creative Commons.

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Source: https://www.marottaonmoney.com/can-i-contribute-to-both-a-sep-and-a-401k/

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