Individual 401(k) and SEP IRAs

Factual Questions
1

I’m just looking for some free tax advice (although I understand any advice given is given as an Internet opinion, may or may not be correct, check with my accountant, etc.)

I’m self-employed - I have an S-corp and am the only employee. I receive a W-2 as compensation and am NOT taxed as a sole proprietorship. It is my only job - I have no other sources of income.

I have a Roth IRA (max contribution $5,500).

I also have an Individual 401(k). (max contribution $17,500 + 25% of my salary from my S-Corp.)

This year, I highly anticipate that I will be able to max out my savings in both the Roth and Individual 401(k) with money left over to save. Basically, I want to know if I can contribute to a SEP IRA in addition to my other retirement plans.

Here’s a sample “year”:

Company earns $70,000 and pays me $40,000. Therefore, my self-employment income is $30,000.

I can contribute $5,500 to my Roth IRA.

I can contribute $27,500 to my Individual 401k ($17,500 + 25% of $40,000).

I can contribute $10,000 to my SEP IRA. (25% of $40,000).

Based on all this, here are my questions:

  1. Can I open a Self-Employed IRA (SEP IRA) in ADDITION to my other retirement savings?

  2. Do these calculations make sense?

Thanks for any and all help.

2

You need a tax accountant. Asking an opinion in a public forum seeking a legitimate answer does not make good business sense. The IRS would be licking their chops in anticipation.

3

I’ve had three accountants in the past three years. They’ve each botched my taxes to the point where filing of current tax year has virtually overlapped taking care of missed taxes (city, municipal, etc) from the previous year. So, it would appear my tax accountants are all taking WAGs, anyway.

Nevertheless, after some more research, it appears that the 25% of salary contribution is across all defined plans, so I can’t contribute 25% to both the Individual 401k and the SEP IRA; I can contribute a total of 25% across both plans (meaning there’s likely no reason, considering the hassle, with having both plans open).

4

Yearofglad - CPA checking in.

I am almost certain you cannot make contributions to a SEP in addition to your 401(k) contributions. As a S corp owner/employee you are not eligible for a SEP plan based on the profit of the corporation, as net profits from an s corp are not considered eligible earnings for SEP plan purposes like Schedule C or Partnership earnings are. The only compensation eligible for SEP contributions is your salary, but since you are already maxing out the 25% to the 401(k) based on your wages, you cannot contribute anything further.

5

Thanks - that agrees with what I discovered in some research after my post, that the 25% contribution is across all plans. I could contribute that 25% to a 401(k) OR a SEP, but can’t contribute more than a total of 25% across those plans.

Thanks for checking in and confirming my suspicions!

6

If your goal is to maximize retirement savings, a defined-benefits plan might be an option. These are pretty complicated; I refer my clients to a third-party administrator that specializes in getting these set up. (And, honestly, no one has decided that it’s worth the extra hassle. They come back to their 401k or SEP and figure that’s good enough.)