2 401k's and a SEP-IRA

Question

I have been a contractor for 9 months of this year where I earned 1099 income. I am an employee with a company that has a 401k. I am over 50 so I can contribute $24,000 to the company 401k, and the employer can contribute a match of let's say $1,000.

Now I need to decide what to do with the 1099 income. I understand that I can contribute to a 2nd "solo" 401k and also a SEP-IRA. Seeing as I will be contributing the maximum to the company 401k, I cannot contribute anything to the solo-401k. However can a contribution be made as a profit-sharing contribution? Question 1.

Question 2: in addition to this can I contribute 25% of my 1099 income to a SEP-IRA account?

(such that totals of all 3 are less than the total limit of $60,000)

Answer 1

Please note that if you are self employed, then the profit sharing limit for both the SEP and Solo 401(k) is 20% of compensation, not 25%.

There is no need for a SEP-IRA in this case. In addition to the 401(k) at work, you have a solo-401(k) for your consulting business. You can contribute $18,000 on the employee side across the two 401(k) plans however you wish. You can also contribute profit sharing up to 20% of compensation in your solo 401(k) plan. However, the profit sharing limit aggregates across all plans for your consulting business. If you max that out in your solo 401(k), then you cannot contribute to the SEP IRA.

In other words, the solo 401(k) dominates the SEP IRA in terms of contributions and shares a limit on the profit-sharing contribution. If you have a solo 401(k), there is never a reason to have a SEP for the same company.

Example reference: Can I Contribute to a solo 401(k) and SEP for the same company?

Answer 2

question #2 - yes, 25% of your 1099 income. Good idea. It adds up quickly and is a good way to reduce taxable income.