There is no exclusive plan rule for a Solo 401(k) Plan and SEP IRA. Only a SIMPLE IRA has an exclusive plan rule, meaning one can not combine a Solo 401k Plan with a SIMPLE IRA. Even though one can have a SEP along with a Solo 401(k) plan, there is generally not many benefits of having both plans established for a business. the reason behind this is that the Solo 401(k) Plan provides participants with more advantages than a SEP IRA. For example, a SEP IRA only includes an employer profit sharing component (20% of compensation for the self-employed and 25% for S and C Corporations), whereas, a solo 401(k) plan, also known as an individual 401(k) plan, includes an employee deferral component ($17,000 if you are under 50 or $22,500 if you are over 50) plus an employer profit sharing contribution option. Hence, it typically does not make much sense to have both a SEP IRA and a Solo 401(k) Plan since the Solo 401(k) Plan, also known an individual 401K offers the plan participants higher deferral options, plus additional features such as a $50,000 tax and penalty free loan.
Therefore, even though a business can have both a SEP IRA and a solo 401(k) plan, there is not much of an advantage of having both plans since the solo 401(k) plan will offer all the advantages of a SEP, plus many additional benefits. One obvious benefit is the higher contributions options. Take for example, an individual who owns a single member LLC. Assuming, the individual earns $100,000 in W-2 income for the year and his over the age of 50. A SEP IRA would only allow that individual to defer 20% of his compensation of $20,000. With a Solo 401(k) Plan, that individual would be able to defer $22,500 as an employee deferral plus an additional 20% of his or her compensation, giving that individual approximately $42,500 for the year. More than double the amount of a SEP IRA. In addition, that individual will have the ability to borrow $50,000 or 50% of his or her account value and use that loan for any purpose.
To learn more about the advantages of the Solo 401(k) Plan over the SEP IRA, please visit our website at www.irafinancialgroup.com or talk to a tax advisor at 800-472-0646.