Stacking Retirement Accounts: SEP IRA or Solo 401(k)

Stacking retirement accounts is a little-known strategy that will grow your retirement nest egg tax deferred while sheltering income from the IRS. Once you decide to stack retirement accounts, it’s time to determine if a SEP IRA or solo 401(k) is best for you.


As with a traditional 401(k), 403(b) or another retirement account, the SEP IRA is subject to contribution limits of $54,000.  However, unlike traditional accounts, employees are not eligible to contribute to a SEP, only employers can make contributions. Employees may make traditional IRA contributions up to the limit in the SEP IRA if the plan allows it.

To determine your ability to contribute as a self-employed individual, and at what level, you must take your net profits (IRS Schedule C) and adjust it to reflect the deduction for Self-Employment Tax. You would then need to divide your adjusted net business profits by 1.25 to account for the maximum 25% of compensation up to $265,000, and take 25% of the final adjusted earned income number.

SEP in Action

Assume an individual, age 50, worked at their primary job and contributed the 2017 employee maximum of $18,000 to their 401(k), while also receiving another $20,000 in profit sharing from their employer.  The individual also works as a consultant, earning $50,000/year. Stacking retirement accounts and using a SEP as outlined above, the individual is able to contribute another $9,294 to their nest egg, while reducing their taxable income by as much as $3,680.42.

Solo 401(k)

The main benefit of a solo 401(K) over a SEP IRA is the ability to make BOTH employee and employer contributions to the plan. For those in a situation where no employee contributions are made at their main job, this can allow for a significant increase in savings.  100% of income up to the $18,000 employee max can be sheltered, with 20% -25% of any additional income sheltered up to the maximum $54,000.

When using a solo 401(k), remain watchful of the employee limit, as unlike the employer limit which is per job, employee contributions are aggregated across plans to reach the individual maximum of $18,000.  Properly tracking and monitoring how contributions are made to your plans will prevent the need to return back excess contributions in the future.

Solo 401(k) in Action

To illustrate the benefit, let’s assume the same 50-year-old individual from above received a profit sharing contribution of $54,000 from their primary employer while earning the same $50,000 as a consultant. Using a Solo 401(k), the individual would be able to contribute $18,000 as an employee contribution + another $6,400 of the additional income. This results in a total contribution of $24,400 and a reduction in taxable income of as much as $9,662.40.

Deciding between a SEP IRA and Solo 401(k)

Both accounts have their merits, and depending on your situation you may find one preferable to the other.  However, just know that your choice of account isn’t set in stone.  Often SEP IRAs are initially opened because of their more lenient tax deadline, which can provide last minute savings to those looking to use this strategy after the last of the year. SEP IRAs can be established up until the individual’s tax filing deadline, after which it may make sense to then roll the SEP IRA into a Solo 401(k) or Roth IRA.

Everyone’s situation is unique and what’s right for one individual is not necessarily the best fit for another. Contact a Claris advisor to determine the best retirement vehicles for you.

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