Retirement Jar

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401(k) and SEP-IRA accounts are two popular retirement savings options used by employers and self-employed individuals. Many savers want to know if it's possible to have both of these retirement plans. The short answer is "yes," but there's more to the story.

401(k) and SEP-IRA accounts: The quick version
Most people are at least familiar with the concept of a 401(k), as it is the most popular retirement plan offered by private-sector employers.

Basically, a 401(k) allows employees to have money withheld from their salary, which is then invested for their retirement on a tax-deferred basis, meaning that no income tax will be owed on contributions or investment profits until the money is withdrawn. Employers have the option of matching employees' contributions, which is usually done as a certain percentage of employee contributions to a maximum percentage of their salary.

For 2016, employees are allowed to divert up to $18,000 of their salary into their 401(k), and an additional $6,000 "catch-up" contribution if they're over 50 years old. Total contributions for the year cannot be more than $53,000, including employer contributions ($59,000 if over 50). Self-employed individuals can open their own 401(k), known as a "solo" or "individual" 401(k), and they can make both the employee and employer contributions. The employer side of the solo 401(k) contribution is limited to 25% of total business income for the year.

SEP IRA accounts are less well-known, and are generally used by self-employed individuals and small businesses. SEP stands for "simplified employee pension," and all contributions are considered to be from the employer. The overall contribution limit is $53,000 for the year or 25% of the employee's compensation -- whichever is less. There is no catch-up contribution allowed for SEP IRA accounts.

Contribution limits depend on your employment situation
The contribution limits if you have both a 401(k) and SEP IRA depend on whether one, both, or neither account is from an employer.

  • If you are an employee and you have both a 401(k) and SEP IRA through your employer, your deferral contribution to the 401(k) cannot exceed $18,000 ($24,000 if over 50), and the total contributions to both accounts cannot exceed $53,000 ($59,000 including 401(k) catch-up contributions).
  • If you are self-employed, you can open a solo 401(k) and SEP IRA, but your total contributions are limited to $53,000 ($59,000 including 401(k) catch-up contributions), unless the "25% of compensation" limitation discussed earlier applies.
  • Finally, if you have a 401(k) through an employer and have a SEP IRA for your self-employment income, each contribution is treated separately. You can defer up to $18,000 of your salary into your 401(k) and your total contribution is limited to $53,000 ($59,000 if over 50) after your employer contributes, as discussed earlier. Since your SEP IRA contributions are considered to come from the employer, none of it counts toward the $18,000 salary deferral limit, so you can contribute up to $53,000 or 25% of your earnings, whichever is less.

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