You can contribute to both a SEP (Simplified Employee Pension) and a 401(k) plan, but there are some rules you need to follow. The maximum amount you can contribute to a SEP plan in 2023 is $66,000 (or 25% of your net self-employment income, whichever is lower). The maximum amount you can contribute to a 401(k) plan in 2023 is $22,500 ($30,000 if you are age 50 or older). If you contribute to a SEP plan, your employer must also make contributions on your behalf. If you contribute to a 401(k) plan, your employer may choose to make matching contributions.
SEP Contributions and Eligibility
A Simplified Employee Pension (SEP) is a retirement plan that allows employers to contribute to their own retirement and the retirement of their eligible employees.
Eligibility
- Self-employed individuals
- Employers with less than 25 employees
- Employees who have worked for the employer for at least three years (consecutive or not)
- Employees who are at least 21 years old
- Employees who have earned at least $650 in compensation from the employer during the year
| Contribution Limits | 2023 | 2024 |
|---|---|---|
| Employer Contributions | $66,000 or 25% of employee’s compensation, whichever is less | $73,500 or 25% of employee’s compensation, whichever is less |
| Employee Elective Deferrals | N/A | N/A |
401k Contribution Limits
The amount you can contribute to a 401(k) plan depends on your age and income. For 2023, the contribution limit is $22,500, with an additional $7,500 catch-up contribution for those age 50 or older.
Rollover Options
If you leave your job, you have several options for rolling over your 401(k) balance. You can:
- Roll it over to an IRA
- Roll it over to a new 401(k) plan at your new job
- Take a cash distribution
The best option for you will depend on your financial situation and retirement goals. If you are not sure which option is right for you, you should consult with a financial advisor.
| Age | Contribution Limit | Catch-Up Contribution Limit |
|---|---|---|
| Under 50 | $22,500 | $7,500 |
| 50 and older | $22,500 | $7,500 |
Joint SEP and 401k Participation
It’s possible for you and your spouse to contribute to both a Simplified Employee Pension (SEP) IRA and a 401(k) plan, but there are some rules to keep in mind:
- Plan eligibility: You must be eligible to participate in both the SEP IRA and the 401(k) plan.
- Contribution limits: The contribution limits for SEP IRAs and 401(k) plans are different. For 2023, the SEP IRA contribution limit is $66,000 (or $73,500 if you’re 50 or older). The 401(k) contribution limit is $22,500 (or $30,000 if you’re 50 or older).
| Plan Type | Contribution Limit |
|---|---|
| SEP IRA | $66,000 |
| 401(k) | $22,500 |
Joint contributions: If you and your spouse are both eligible, you can make contributions to both plans.
Tax benefits: Contributions to both SEP IRAs and 401(k) plans are tax-deductible. Earnings grow tax-deferred until you withdraw them in retirement.
Tax Advantages of SEP and 401k Plans
SEP (Simplified Employee Pension) and 401(k) plans are both retirement savings plans that offer tax advantages to employees and employers. Here’s a breakdown of their key tax benefits:
SEP Plans
- Tax-deductible contributions: Employers can deduct SEP contributions from their business income, reducing their taxable income.
- Tax-free employer contributions: Employer contributions to SEP plans are not subject to income tax or FICA taxes.
- Tax-deferred growth: Earnings on SEP investments grow tax-free until withdrawn in retirement.
401(k) Plans
- Pre-tax employee contributions: Employees can contribute pre-tax dollars to their 401(k) accounts, reducing their current year taxable income.
- Tax-deferred growth: Contributions and earnings grow tax-free within the 401(k) account until withdrawn.
- Partial withdrawals may be tax-free: Roth 401(k) accounts allow for tax-free withdrawals of earnings in retirement, provided certain conditions are met.
| Plan Type | Employer Tax-Deductible Contributions | Employee Income Tax on Contributions | Tax Treatment of Earnings |
|---|---|---|---|
| SEP | Yes | No (for employer contributions) | Tax-deferred |
| 401(k) (traditional) | No | Yes (for pre-tax contributions) | Tax-deferred |
| 401(k) (Roth) | No | No (for after-tax contributions) | Tax-free (earnings only) |
Whew! We’ve covered a lot of ground today about contributing to both a SEP IRA and a 401(k) plan. I know it can be a bit mind-boggling, but remember, knowledge is power! So, pat yourself on the back for taking the time to educate yourself. If you have any specific questions or want to dive deeper, don’t hesitate to drop me a line. I’m always happy to help you get the most out of your retirement savings options. Thanks for joining me on this financial adventure. Stay tuned for more money-savvy tips and strategies!