Yes annual contributions can be made to both a SEP IRA and a Solo 401k

BACKGROUND: I’m self-employed with no full-time employees and already contributed to my SEP IRA for this year; however, I just found out about the solo 401k plan and would like to maximize my annual contribution this year and going forward.  Because the SEP IRA only consists of employer contributions (profit sharing), I would like to open a solo 401k plan and then contribute the employee (salary deferral) contribution to the solo 401k since I have already maximize my profit sharing contribution to the SEP IRA this year.

QUESTION: So my question is can I open a solo 401k even though I already have a SEP IRA and already made my SEP IRA contribution for the year?

ANSWER: Yes a self-employed business can open a SEP IRA and a Solo 401k plan and, therefore, contribute to both plans.  This is confirmed in chapter 2, page 6 “More than one plan” of IRS Publication 560. However, the combined contribution for both plans (the SEP IRA and Solo 401k) may not exceed the annual contribution limit for the year. Therefore, for your particular situation, you could open a solo 401k (i.e., signed the solo 401k plan documents) by December 31 of this year so that you can make the salary deferral contribution by the time you file your business tax return next year.  What’s more, if you are age 50 or older, you can also make the catchup contribution to the solo 401k plan. Lastly, going forward, you can transfer the SEP IRA to the solo 401k plan or continue contributing to both (the SEP IRA and the solo 401k plan).

Thanks,

Jeremy in Marco Island Florida

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

MENU