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- You can have both a SEP IRA and a 401k.
- SEP IRA is designed for self-employed individuals and small business owners.
- A 401k is typically an employer-sponsored retirement plan.
- SEP IRA allows contributions up to 25% of net earnings or $66,000 (whichever is lower).
- 401k contribution limits for 2025 are $22,500, with an additional $7,500 catch-up contribution for those 50 or older.
- Combining both accounts can increase your overall retirement savings potential.
- Contributions to both accounts are subject to separate IRS limits.
- Both accounts offer tax-deferred growth, reducing current-year tax liability.
- SEP IRA offers more flexibility in investment choices compared to a 401k.
- Required minimum distributions (RMDs) apply to both SEP IRAs and 401ks starting at age 73.
- Consulting a financial advisor or tax professional is helpful when managing both accounts.
When it comes to saving for retirement, there are many options available. Two common choices are the SEP IRA and the 401k. Both of these retirement accounts offer different benefits and can help individuals prepare for the future.
But, one important question that often arises is, Can you have a SEP IRA and 401k? Let’s explore the answer to this question and understand how these accounts work together.
Introduction
Retirement savings are crucial for building financial security in the future. In the U.S., there are several retirement accounts available to individuals and business owners. Among the most popular are the SEP IRA and 401k.
The SEP IRA is a retirement account designed for self-employed individuals or small business owners, while the 401k is a common employer-sponsored retirement plan for employees.
Many individuals may wonder if it’s possible to have both a SEP IRA and 401k. Understanding the rules around these accounts can be helpful in planning your retirement strategy. In this article, we will answer the question, Can you have a SEP IRA and 401k? and explain how these two retirement accounts work together.
Can You Have a SEP IRA and 401k?
The short answer is yes, you can have both a SEP IRA and a 401k. However, there are some important rules and limitations to consider. It’s essential to understand how each retirement account works and how they can complement each other.
A SEP IRA, or Simplified Employee Pension Individual Retirement Account, is a retirement plan for self-employed individuals or small business owners. It allows employers to contribute to their employees’ retirement funds and is known for its flexibility and higher contribution limits compared to other retirement accounts.
On the other hand, a 401k is typically an employer-sponsored plan that allows employees to contribute a portion of their salary to their retirement fund, often with employer matching contributions.
You can have both a SEP IRA and a 401k as long as you meet the eligibility requirements for each account. If you are self-employed, you can contribute to both a SEP IRA and a 401k, but the total contribution limits across both accounts will apply.
Understanding Contribution Limits
One important consideration when having both a SEP IRA and a 401k is the contribution limits. The IRS sets annual contribution limits for each retirement account, and these limits can vary depending on your income and employment status.
For a SEP IRA, the contribution limit for 2025 is the lesser of $66,000 or 25% of your net earnings from self-employment. This limit applies to both business owners and their employees. For a 401k, the contribution limit for 2025 is $22,500 for employees under the age of 50, with an additional $7,500 in catch-up contributions allowed for those aged 50 or older.
These limits apply only to employee contributions, but employers can also contribute to a 401k plan, up to a total limit of $66,000 (or $73,500 if you’re 50 or older) including both employee and employer contributions.
If you have both a SEP IRA and a 401k, you must ensure that your total contributions to both accounts do not exceed the IRS limits. For example, if you contribute the maximum amount to a 401k ($22,500), you can still make a contribution to your SEP IRA, but the combined total of your contributions to both accounts cannot exceed the contribution limits set by the IRS.
The Benefits of Having Both Accounts
Having both a SEP IRA and a 401k can offer several benefits, depending on your financial situation and retirement goals. Let’s take a closer look at the advantages of having both accounts.
1. Higher Contribution Limits
One of the main benefits of having both a SEP IRA and a 401k is the ability to contribute more to your retirement savings. Since each account has separate contribution limits, you can potentially save more money in retirement by contributing to both accounts.
With the SEP IRA, you can contribute up to 25% of your net earnings from self-employment, while the 401k allows you to contribute up to $22,500 as an employee. Together, these two accounts provide a larger retirement savings pool, which can be especially valuable for individuals who are self-employed or small business owners.
2. Tax Benefits
Both the SEP IRA and 401k offer tax-deferred growth, meaning you won’t pay taxes on your contributions or earnings until you withdraw the funds in retirement. This allows your retirement savings to grow faster than if you were paying taxes on the contributions each year.
Having both a SEP IRA and a 401k can increase your tax-deferral potential, helping you build a larger nest egg for the future.
Additionally, if your employer offers a matching contribution to your 401k, this can be an excellent way to maximize your retirement savings. The SEP IRA also offers the flexibility to make larger contributions, which can help reduce your taxable income for the year.
3. Diversification of Investment Options
Another advantage of having both accounts is the opportunity to diversify your investment options. With a 401k, your investment options are typically limited to the options provided by your employer’s plan.
However, with a SEP IRA, you have more control over your investment choices, as the account is typically held with a financial institution of your choice. This allows you to invest in a broader range of assets, such as stocks, bonds, and mutual funds.
By having both a SEP IRA and a 401k, you can create a more diversified portfolio, which can reduce risk and increase potential returns over time.
Potential Drawbacks of Having Both Accounts
While there are several benefits to having both a SEP IRA and a 401k, there are also some potential drawbacks. It’s important to consider these before deciding whether or not to open both types of retirement accounts.
1. Complex Contribution Calculations
One of the challenges of having both a SEP IRA and a 401k is that the contribution limits for each account must be calculated separately. The IRS sets different contribution limits for each account, and these limits depend on your income, employment status, and other factors.
Keeping track of these limits can be challenging, especially if you are self-employed or have multiple sources of income.
It may be helpful to consult with a financial advisor or tax professional to ensure that you are maximizing your contributions while staying within the IRS limits.
2. Required Minimum Distributions (RMDs)
Both SEP IRAs and 401ks are subject to required minimum distributions (RMDs) once you reach age 73. This means that you will be required to start taking distributions from your retirement accounts and paying taxes on the withdrawals. If you have both a SEP IRA and a 401k, you will need to take RMDs from both accounts once you reach the required age.
This could lead to larger taxable distributions in retirement, which could impact your overall tax situation. Be sure to plan ahead to ensure that you are prepared for RMDs and their potential tax implications.
3. Administrative Fees
Another potential drawback of having both a SEP IRA and a 401k is that both accounts may come with administrative fees. While 401k plans typically have higher fees, some SEP IRAs can also carry fees for account maintenance and management.
If you are managing both accounts yourself, it’s important to be aware of any fees that could reduce your overall returns.
Frequently Asked Questions
Here are some of the related questions people also ask:
Can I contribute to both a SEP IRA and a 401k in the same year?
Yes, you can contribute to both a SEP IRA and a 401k in the same year, but the contributions must stay within the IRS limits for each account.
What is the difference between a SEP IRA and a 401k?
A SEP IRA is designed for self-employed individuals and small business owners, allowing them to contribute more to retirement. A 401k is an employer-sponsored plan where employees can contribute a portion of their salary, often with employer matching.
How much can I contribute to a SEP IRA and 401k in 2025?
For a SEP IRA, you can contribute up to 25% of your net earnings or $66,000 (whichever is lower). For a 401k, the contribution limit is $22,500, with an additional $7,500 for those aged 50 or older.
Can I have both a SEP IRA and a 401k if I am self-employed?
Yes, if you’re self-employed, you can have both a SEP IRA and a 401k, but the contributions to each must be within the respective limits set by the IRS.
Are SEP IRA and 401k contributions tax-deductible?
Yes, both SEP IRA and 401k contributions are tax-deferred, meaning you don’t pay taxes on the contributions or investment earnings until you withdraw them in retirement.
Do I have to take required minimum distributions (RMDs) from both a SEP IRA and a 401k?
Yes, once you reach age 73, you must take required minimum distributions (RMDs) from both a SEP IRA and a 401k.
Can I contribute to a SEP IRA and 401k if I have a full-time job?
Yes, if you have a full-time job with a 401k, you can still open and contribute to a SEP IRA if you’re self-employed or have additional sources of income.
What are the advantages of having both a SEP IRA and a 401k?
Having both accounts allows for higher contribution limits, more tax-deferred savings, and increased investment diversification.
Are there any fees associated with having both a SEP IRA and a 401k?
Yes, both SEP IRAs and 401ks may have administrative or management fees, depending on the plan providers. It’s important to be aware of these fees as they can reduce your returns over time.
The Bottom Line
So, can you have a SEP IRA and 401k? Yes, you can. In fact, having both accounts can provide several benefits, including higher contribution limits, tax advantages, and investment diversification.
However, it’s important to keep track of the contribution limits for both accounts and consider the potential drawbacks, such as complex calculations and required minimum distributions.
If you’re self-employed or a small business owner, a SEP IRA can be an excellent tool for saving for retirement, and a 401k can further enhance your savings if your employer offers one. By understanding the rules and limitations of both accounts, you can maximize your retirement savings and set yourself up for a secure financial future.
Before making any decisions, it’s a good idea to consult with a financial advisor or tax professional to ensure that you are making the best choice for your individual retirement goals.