401(K) and SEP contributions does 1 limit other?
Hello,
participating in a 401(k) and having a small business on side with an active sep IRA. does my participationg in 401(k) limit my contributions to my sep IRA?
Hello,
participating in a 401(k) and having a small business on side with an active sep IRA. does my participationg in 401(k) limit my contributions to my sep IRA?
Permalink Submitted by Lee Martinson on Wed, 2011-12-21 23:48
For the purposes of the rule, a SEP is considered a defined contribution plan. You can contribute to both the 401k and the SEP but the total of all contributions to both plans cannot surpass $49,000 or 100% of compensation, whichever is less.
Source: Pub 560 year 2010 page 6 under “How Much Can I Contribute,” subheading “More Than One Plan.”
Lee
Permalink Submitted by Peter Lingane on Thu, 2011-12-22 07:03
We need to distinguish between the situation in which the 401k plan is sponsored by a corporation at which the participant is only a small cog in the wheel and a situation in which the 401k plan is sponsored by a small business controlled by the participant. In the former case, there are separate 415 limits for the 401k plan and for the SEP.
Pub 560 is referring to a situation in which the same employer sponsors both a 401k and a SEP plan. (The word “you” references the employer.) All defined contribution plans sponsored by the same employer share a single 415 limit.
Permalink Submitted by Lee Martinson on Thu, 2011-12-22 15:37
Interesting Peter. So in this case of wearing two hats, one as a “mere” employee working for someone else and participating in that 401k and one as a business owner where you do your own SEP, you are saying that he could max out in both and that the one does not limit the other?
I looked at section 415 and I don’t see where it actually says that you can, but it does look like it implys that the limit only applies to plans aggregated with one employer.
Permalink Submitted by Peter Lingane on Thu, 2011-12-22 16:53
The 402(g) limit on elective deferrals is per employee; the 415(c) limit is per employer.
The gray area is determining when two businesses run by the same person constitute separate businesses. This has been discussed on this site within the past year but I can’t immediately provide a citation.
Since the gray area is exceedingly complex, professional assistance is recommended. See also the Pension Answer Book.
Permalink Submitted by Bruce Steiner on Thu, 2011-12-22 23:39
Peter is correct that it’s complicated, but in most cases it’s not gray. The lawyer should check the applicable provisions in Section 414 and figure it out.