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Making Contributions to Solo 401(k) and SEP IRA

Contributions to Solo 401(k) and SEP IRA

If you ask: Can I Make Contributions to Solo 401(k) and SEP IRA…

The answer is, Yes. You certainly can make contributions to a Solo 401(k) and SEP IRA. In other words, a business can have both a SEP IRA and a Solo 401(K) Plan, although, there is generally no advantage for a business to have both active at the same time.

A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan.

Under the 2018 Solo 401(k) contribution rules, if you, the plan participant, is under the age of 50, you can make a maximum employee deferral contribution in the amount of $18,000. You can make that amount in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% profit sharing contribution up to a combined maximum. This includes the employee deferral of $54,000. It’s 20% in the case of a sole proprietorship or single member LLC.

If you are over the age of 50, you can make a maximum employee deferral contribution in the amount of $24,000. Again, you can make this amount in pre-tax or after-tax (Roth). Of course, on the profit sharing side, the business can make a 25% profit sharing contribution up to a combined maximum, including the employee deferral of $60,000. For a sole proprietorship or single member LLC, it’s 20%.

The SEP IRA

In the case of the SEP IRA only allows for a profit sharing contribution. Hence, a participant in a SEP IRA is limited to 25% profit sharing contribution up to a combined maximum of $54,000 for 2018. Again, it’s 20% in the case of a sole proprietorship or single member LLC. No employee deferral exists for a SEP IRA.

For example, Joe, who is 60 years old, owns 100% of an S Corporation with no full time employees. Joe earned $100,000 in self-employment W-2 wages for 2018. If Joe had a Solo 401(k) Plan established for 2018, he would be able to defer approximately $49,000 for 2018 (a $24,000 employee deferral, which could be pre-tax or Roth, and 25% of his compensation giving him $49,000 for the year). Whereas, if Joe established a SEP IRA, he would only be able to defer approximately $25,000 (25% of his compensation) for 2018.

In other words, if you have both a SEP IRA and a Solo 401(k) Plan, it will not allow a business owner to defer more than $54,000 ($60,000 if you are over the age of 50) for 2018. Most individuals will use a Solo 401(k) Plan vs. a SEP IRA since they can reach the maximum annual contribution limit quicker than a SEP IRA, as the Solo 401(k) Plan includes both an employee deferral and profit sharing component. Whereas, a SEP IRA just includes just a profit sharing component.

To learn more about the benefits of a Solo 401(k) Plan vs. a SEP IRA, please contact a tax professional at 800-472-0646.

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Posted in Solo 401(k)