How to Coordinate a SEP IRA and a 401k From Your Day Job

Having a side business can open the door to extra retirement savings, especially if you are already participating in a 401k through your day job. At first glance, it may look like you are doubling your retirement benefits. But the IRS has contribution limits that apply across both plans, and coordinating them takes careful planning.

You are generally allowed to contribute to both a SEP IRA and a 401k. However, two separate IRS limits come into play: one for employee salary deferrals and another for total combined contributions across all plans. These rules apply even if your SEP and 401k are tied to different employers.

If you want to understand how to make the most of both plans in 2025 without triggering excess contributions or IRS penalties, keep reading. This guide walks through how the limits work, how SEP and 401k contributions interact, and how business structure can affect your strategy.

📌 Also read: 57 Important Retirement Plan Statistics For 2025

2025 Contribution Limits & Aggregation Rules

Retirement plans such as a SEP IRA or a traditional 401k fall under specific IRS limits that are updated annually. If you are contributing to both through unrelated employers, it is essential to understand how each limit applies.

There are two main caps to keep in mind: one for employee deferrals, and another for combined contributions. These limits are governed by different sections of the Internal Revenue Code and serve distinct purposes.

📝 Note: These limits do not exist in isolation. They interact based on your role (employee vs. employer) and how your businesses are structured.

Understanding the Two Key Limits

Here is how the contribution rules break down for 2025:

✅ Employee Elective-Deferral Limit

This cap applies to salary deferrals made into plans such as a 401k, 403b, or similar workplace retirement account.

These deferrals apply across all plans you participate in, even if from different employers. That means if you max out $23,500 at your day job’s 401k, you generally cannot defer more into a Solo 401k or any other plan in the same year.

✅ Annual Additions Limit

This rule limits the total amount contributed on your behalf, including both employer and employee contributions, to defined-contribution plans in a year.

📝 Note: The compensation used for calculating these limits may differ depending on your business structure. For SEP IRA contributions, Publication 560 outlines how to compute net earnings for sole proprietors or partners. In contrast, S-Corp owners use W-2 wages.

SEP IRA contributions count toward the 415(c) limit, since SEP plans are treated as employer-only defined-contribution arrangements. That means they do not allow employee deferrals, but still follow the same total-contribution ceiling.

How 415(c) Applies Across Two Plans

The 415(c) limit is applied per employer — not per plan. So if your 401k is sponsored by your day job and your SEP IRA is funded through an entirely separate business, each plan may be tested independently under the annual additions rule.

However, if both your W-2 job and your side business are considered part of a controlled group or affiliated service group under IRS rules, the 415(c) limit would apply across all combined plans. This is rare for most side-business owners but worth checking if there is any overlap in ownership, control, or service relationships between the two employers.

Summary of Key Scenarios:

If the total annual additions exceed the 415(c) cap, the excess must be corrected promptly. This often means the plan administrator must reclassify or return the excess contributions based on IRS correction procedures. Failing to do so could lead to compliance failures and possible tax penalties.

📝 Note: Employers and plan participants should monitor contributions throughout the year, not just at year-end. Real-time tracking can help prevent excess allocations and give you time to fix issues before they trigger a reporting error.

Eligibility & Deductibility When You Wear Two Hats

It is common to have both a traditional 401k at your main job and a SEP IRA through your side business. If this applies to you, the key is to understand how the two roles — employee and employer — are treated under IRS rules.

You are allowed to participate in your day job’s 401k as an employee while also sponsoring a SEP IRA as the business owner of your side activity. The SEP is treated as an employer plan. It is available to businesses of any size, including sole proprietorships, partnerships, and corporations, even single-person businesses.

Who can set up a SEP IRA?

✅ Sole proprietors, freelancers, and contractors
✅ Partnerships and LLCs
✅ S-Corps and C-Corps

In all cases, the business is the plan sponsor. SEP contributions are made by the business, not by the individual as an employee deferral.

📝 Note: SEP contributions are employer-only. That means you are not making salary deferrals like you would in a 401k. Instead, the business contributes directly to your SEP IRA based on your eligible compensation.

How Deductions Work Based on Business Type

Who gets to claim the deduction for SEP contributions depends on how your business is structured.

If you are self-employed (such as a sole proprietor or partner):

If you operate an S-Corp or C-Corp:

📝 Note: SEP contributions for yourself must follow the same IRS percentage limits (up to 25% of eligible compensation, subject to 415(c) and income limits). For self-employed individuals, the contribution rate is adjusted to roughly 20% of net earnings after the self-employment tax deduction.

What Happens on the 401k Side

Your day-job 401k contributions are considered employee salary deferrals. These amounts come out of your paycheck and are excluded from Box 1 of your W-2. However, they are still shown in Box 12 with code D, which identifies 401k deferrals.

📝 Note: These deferrals lower your federal taxable wages, but they are still subject to Social Security and Medicare taxes. That is why your take-home pay drops, but your W-2 income remains FICA-taxable.

The deduction for 401k deferrals is handled by your employer through payroll and is separate from any SEP deduction your side business might claim.

Traditional IRA Deductibility When You’re Covered at Work

If you also contribute to a traditional IRA, your ability to deduct it on your personal tax return may be limited if you are already covered by a workplace plan like a 401k.

The IRS applies income-based phase-out ranges to determine how much of your traditional IRA contribution is deductible. These limits change each year. For 2025, Publication 590-A and the IRS website will list the latest thresholds based on your tax filing status and modified adjusted gross income (MAGI).

Remember:

📝 Note: If your spouse is covered by a workplace plan but you are not, your IRA deduction could still be limited based on joint income. Check the IRS phase-out ranges carefully to avoid overestimating your tax deduction.

Final Thoughts

Balancing a SEP IRA with a day-job 401k takes planning, but it is fully doable when you understand how the limits fit together. Start with your 401k totals, then calculate your SEP contribution based on what is left under the combined cap. 

Keeping clear records and updating them throughout the year can help you avoid surprises and stay on track through tax time.

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