Solo 401k Plan Contribution Differences over SEP IRA

QUESTION: After further discussion with other vendors, I believe the following to be true:  If I am currently enrolled as an employee in another vendor’s 401K plan and I’m contributing my maximum there as an employee, the only amount I can contribute (tax-preference) under a Solo 401k is profit sharing. In this context a Solo 401K and a SEP have the same limits of contribution (25% of compensation), Correct?

Thanks, FL

ANSWER: For the most part the vendor's comments are correct. However, with respect to the employee contribution portion, if you do not contribute the full amount to your current day job 401k, you can make up the employee contribution amount difference in your Solo 401k, provided your self-employed business generates enough net self-employment income to cover the solo 401k contribution.  

With respect to profit sharing contributions, yes the SEP and the Solo 401k plan have the same limits. However, the $5, 5000 catch-up amount for those aged 50 an up does not apply to SEP IRA like it does to the Solo 401k. 

Can catch-up contributions be made to a SEP?

“No. SEPs are funded by employer contributions only. However, catch-up contributions can be made to the IRAs that hold the SEP contributions if the SEP-IRA documents allow. The catch-up IRA contribution amount (for employees age 50 and older) is $1,000.” Source IRS.gov.

  

Closing Words

What makes the Solo 401k plan more advantageous over a SEP IRA from a contribution perspective is that only profit sharing/employer contributions can be contributed to a SEP IRA, whereas the Solo 401k plan allows for both profit sharing contributions and employee/salary deferral contributions as well as a higher catch-up amount as described above.