Can I Contribute to a SEP IRA and 401(k)?

Lower your tax bill with a retirement plan.
Lower your tax bill with a retirement plan. (Image: David Sacks/Lifesize/Getty Images)

A 401(k) plan and a SEP-IRA are both ways to save for retirement while saving on current taxes. A 401(k) plan lets employees put money aside through payroll deduction, while a SEP-IRA helps self-employed individuals save for their retirements. If you have both wages and self-employment income, you can contribute to both your employer's 401(k) plan and your own SEP-IRA.

W2 Income

Since your 401(k) plan is funded out of your paycheck, you must have W2 income in order to qualify. If you also have income from self-employment, such as consulting work or freelance jobs, you can open a SEP-IRA as well and shelter even more income. Sign up for your firm's 401(k) plan and choose your investments.

Self-Employment Income

You must have self-employment income in order to qualify for a SEP-IRA. If you receive a 1099 from one or more clients, or if you self-report income from freelance or consulting work, you can shelter a portion of that income from current taxes by setting up a SEP-IRA. Taxes for self-employed individuals can be quite high, so it definitely pays to look into a SEP-IRA as a way of lowering your tax burden while setting money aside for retirement.

Plan Administrator

You can have both a 401(k) plan and a SEP-IRA if you have wages and self-employment income, but chances are those plans will have different administrators. When you participate in your employer's 401(k) plan, you have no choice about the administrator. Each company picks a mutual fund company, insurance company, bank or brokerage firm to administer the 401(k), and employees must work with that administrator. But when you set up your SEP-IRA, you can select the administrator of your choice. You can set up a SEP-IRA with a bank, brokerage firm or mutual fund company, depending on which investments you want to use and the cost of each plan. Look for a SEP-IRA with low fees and a wide range of investment choices.

SEP-IRA Calculator

The formula used to determine the maximum allowable SEP-IRA contribution can be a bit complex, so it is a good idea to use a SEP-IRA calculator to make your life easier. These calculators are available at a wide range of websites, including sites run by brokerage firms and mutual fund companies. If you use a CPA, he can help you maximize your SEP-IRA contribution. Many tax preparation programs also include calculators you can use to determine the maximum SEP-IRA contribution based on your self-employment income.

401(k) Limits

The contribution limits for 401(k) plans change from time to time, so it is a good idea to consult with your CPA or other tax professional before planning your taxes for the coming year. For 2010 and 2011, the contribution limit for an employer-sponsored 401(k) plan is $16,500 for workers 49 and younger and $22,000 for those 50 and older.

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