You can have both a 401k and a SEP IRA. A 401k is a traditional employee-funded defined contribution plan. A SEP IRA is a type of IRA that is available to self- employed individuals. Both plans offer tax-advanteged growth potential. Contributions to a 401k are typically made through payroll deduction and can be either pre- or post- tax. Contributions to a SEP IRA are made directly by the individual. The annual contribution limit for a 401k in 2023 is $22,500, plus a catch-up contribution of $7,500 for those who are at least 50 years old by the end of the year. The annual contribution limit for a SEP IRA in 2023 is up to 30% of net self- employment income, or a maximum of $66,000, plus a catch-up contribution of up to $583, or a maximum of $67,500.
401(k) Contribution Limits
401(k) plans are employer-sponsored retirement savings plans that allow employees to make tax-deferred contributions. The amount that you can contribute to your 401(k) plan is limited by the IRS. For 2023, the contribution limit is $22,500. If you are age 50 or older, you can make an additional catch-up contribution of $7,500. For 2024, the contribution limit is $23,500 and the catch-up contribution limit is $8,000.
In addition to the regular contribution limit, you may also be able to make employer matching contributions. Employer matching contributions are contributions that your employer makes to your 401(k) plan on your behalf. The amount of employer matching contributions that you can receive is limited by the IRS. For 2023, the limit is 100% of your salary, up to a maximum of $66,000 ($73,500 for 2024).
If you have a SEP IRA, you can also make contributions to your 401(k) plan. However, the amount that you can contribute to your 401(k) plan is reduced by the amount that you contribute to your SEP IRA. For 2023, the maximum amount that you can contribute to your 401(k) plan is $22,500, minus the amount that you contribute to your SEP IRA. For 2024, the maximum amount that you can contribute to your 401(k) plan is $23,500, minus the amount that you contribute to your SEP IRA.
The following table summarizes the 401(k) contribution limits for 2023 and 2024:
| Year | Contribution Limit | Catch-Up Contribution Limit |
|---|---|---|
| 2023 | $22,500 | $7,500 |
| 2024 | $23,500 | $8,000 |
SEP IRA Contribution Limits
Employer Contributions
In 2023, employers can contribute up to the lesser of:
- 25% of compensation (up to a maximum of $66,000)
- The amount that would have been contributed to a traditional 401(k) had the plan allowed such employer contributions
Employee Contributions
SEP IRAs do not allow employee contributions.
Basis Limits
The annual basis limit for SEP IRAs is the same as the annual contribution limit. In 2023, the basis limit is $66,000.
Table: SEP IRA Contribution Limits
| Contribution Type | 2023 Limit |
|---|---|
| Employer Contributions | 25% of compensation (up to $66,000) |
| Employee Contributions | Not allowed |
| Basis Limit | $66,000 |
Can I Have a 401k and a Sep?
Yes, you can have both a 401k and a Sep. In fact, it’s a great idea to diversify your retirement savings by having money in both types of accounts.
401ks are employer- sponsored retirement plans that offer tax advantages. With a 401k, you can contribute a certain percentage of your paycheck to the plan, and your employer may contribute as well.
SEPs are retirement plans that are available to self- employed individuals and business owners. With a Sep, you contribute to your own account, and you receive a tax deduction for your contributions.
Here is a table summarizing the key differences between 401ks and SEPs:
| Feature | 401k | Sep |
| Employer Sponsored | Yes | No |
| Contribution Limits | $20,500($27,000 for those age 50 and older)(2023) | 25% of net income, or $66,000($73,00 for those age 50 and older)(2023) |
| Tax Advantages | Contributions are tax-deductible. Withdrawals are taxes as income. | Contributions are tax-deductible. Withdrawals are taxes as income. |
Tax Benefits of Combined Retirement Accounts
Combining a 401(k) and a SEP IRA can provide significant tax benefits for retirement savings. Here’s how they work together:
- 401(k) Contributions: Contributions are made on a pre-tax basis, meaning they are deducted from your paycheck before income taxes are calculated. This reduces your current taxable income, potentially saving you money on income taxes each year.
- SEP IRA Contributions: Contributions are also pre-tax, but they are made by your employer on your behalf, typically based on your salary or net income. This reduces the amount of taxable income for your employer, providing potential tax savings for the business.
By combining these retirement accounts, you can maximize your tax-deductible contributions and reduce your overall tax burden. This can lead to more money being saved for retirement and potential tax savings in the long run.
Here is a table summarizing the tax benefits of having both a 401(k) and a SEP IRA:
| 401(k) | SEP IRA | |
|---|---|---|
| Contributions | Pre-tax | Pre-tax |
| Contribution Limits | $22,500 for 2023 ($30,000 with catch-up) | The lesser of 25% of net income or $66,000 for 2023 |
| Tax Savings | Reduces current taxable income | Reduces employer’s taxable income |
Folks, that’s the 411 on 401(k)s and SEPs. If you’re still scratching your head, don’t fret! Check out our other groovy articles for more financial wisdom. Thanks for hanging out, and hit us up again soon. We always love a good retirement chat!