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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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401K and SEP-IRA contributions

Customer Question

Can I participate in 401(k) with one employer and have second employer contribute to my SEP-IRA?
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

Yes you may participate in both plans, however, the opportunity to avoid taxes through elective deferrals is limited. You may not have more than the prescribed elective deferral amount per taxable year made on your behalf (Generally, the employee's taxable year is the calendar year). Pursuant to IRC Sec. 402(g)(1) your maximum deferral for 2005 is $14,000 ($15,000 in 2006). So the maximum deferral from your salary you can make in 2005 through both employers is $14,000. How you split it up between the two is up to you. Yes, there are excess contribution penalties that could be imposed by the IRS if you exceed this limitation. Remember, your deferrals are reported on your W-2 so they will see it.


However, with respect to employer contributions to your 401(k) you are limited to the lesser of 100% of compensation (subject to maximum compensation limits) or $40,000 (including deferrals by you). Thus, if you defer $14,000 into the 401(k) and SEP-IRA from your wages, your employer may contribute up to an additional $26,000 to the 401(k) as a profit sharing contribution. Contributions to SEP-IRA's are limited to the lesser of 25% of compensation (subject to maximum compensation limits) or $40,000.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Christopher Phelps and other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: Thank you very much, answer was very helpful and detailed. I need only one clarification:
1. Is employer 'matching' contribution considered a profit sharing contribution? In other words, is it counted agains $14,000 deferal limit or against $40,000 (minus defereals by me)?
Expert:  Christopher Phelps replied 11 years ago.
Its only counted against the $40,000 limit.

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