Contribution Limits: 401(k) and SEP / SIMPLE IRAs
If someone is eligible through W2 income to contribute in full to a 401(k), would they also have the full contribution limit of any SEP IRA or Simple IRA? What if the 401(k) was a solo 401(k)? Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2021-09-16 13:32
Max contribution to a 401k including a solo k will use up the full 402(g) elective deferral limit, leaving no room to contribute to a SIMPLE IRA which is subject to the same 402(g) limit. However, SEP IRA contributions for a separate business are not affected.
Permalink Submitted by William Tuttle on Thu, 2021-09-16 19:33
An individual is only eligible to adopt a 401k, SEP or SIMPLE IRA and base contributions on earned income from being engaged in a trade or business.
There is only one employee deferral limit (2021 = $19.5K) for all 401k, 403b and SIMPLE IRA plans.
There is a separate (employee + employer) annual addition limit (2021 = $58K) for each unrelated employer.
As Alan pointed out, if an individual reaches the employee deferral limit through a W-2 employer, they are not eligible to make any employee deferrals to a one-participant 401k or SIMPLE IRA.
However, as long as the indiviual has another business unrelated to their W-2 employer, they have a separate annual addition limit.
They could make employer contributions up to 25% of compensation* not to excess the annual addition limit to a one-participant 401k or SEP IRA.
*This is either 25% of W-2 wages or 20% of net earnings from self-employment (earned income) = business profits – 1/2 SE tax.