Can You Contribute To A 401(k) And SEP-IRA At The Same Time?

July 13, 2018

One trend I’ve noticed in recent years is people with full-time jobs starting a business on the side. Some folks are looking to earn some extra cash and some are passionate about a hobby or pursuit and want to try to make a business from that passion.

If you have a side gig such as catering, photography, or blogging in addition to your “real job,” it’s important to know that there are distinct types of retirement plans that you can use for each. Being aware of how they work together can allow you to save more for retirement, while possibly saving on taxes today.

What is a SEP?

First, a quick review of what a SEP-IRA is. Most of us are familiar with our 401(k) plans at work – in order to contribute, you have to work for the company that’s providing it. Similarly, a SEP-IRA is a retirement plan tied to a company, but it’s specifically designed for self-employed individuals and small businesses.

How do contributions work?

Unlike the 401(k), where both the employer and employee are able to contribute to the account, all contributions to a SEP-IRA are considered employer contributions. For 2018, you can contribute the lesser of 25% of your gross salary (or 20% of your net adjusted annual self-employment income) up to a maximum of $55,000. You have until your tax filing deadline to make your contribution, so many people with SEPs choose to wait until then so that they know exactly how much they can put in (your CPA and most tax prep softwares will calculate this amount for you).

Keep in mind that if you employ anyone to help out with your business, you also have to put the same amount in their account as you save for yourself. You can adjust your contributions each year, so if your business is having a great year, you can save more. You can also save less (or not at all) in years that are tight. However, you do have to have self-employed income to make any contributions.

Can I use a SEP-IRA if I also contribute to my 401(k)?

If you are an employee of the company you work for (aka you receive a W-2 at tax time) and you also have a side business that you own, you can actually make contributions to your employer’s 401(k) plan and contribute to a SEP-IRA for your business. That means that having a side gig can allow you to save beyond the 401(k) annual limit of $18,500 (or $24,500 if you’re over age 50)!

Here’s an example of how it might work:

  • Let’s say you are already maxing out your 401(k) at work.
  • Now let’s say you also do a little wedding photography on the weekends, which brings in another $20,000 this year.
  • You could open a SEP-IRA and contribute $5,000 (25% of $20,000) for this year.
  • Because the 401(k) and SEP-IRA are with two different companies with no common control, saving in your 401(k) does not impact how much you can save into a SEP-IRA.
  • It’s important to note that if you have two jobs where you work for someone else and have 401(k)’s at both, that the $18,500/$24,500 limit applies to both across the board; the SEP-IRA, however, could be in addition to the 401(k).

As you can see, the potential to reduce your taxable income and save for retirement becomes very powerful!

Other things to consider

  • It is crucial to run your situation by your tax professional to make sure your strategy is best suited to you.
  • I also suggest reviewing this FAQ site from the IRS to get additional information.
  • My colleague, Scott has also written a great piece about SEP IRAs that can help if you’re looking to set one up.

Understanding your options and having a well-coordinated plan can help you manage your taxes and do some serious savings for retirement!