Can I Use a SEP IRA and Solo 401(k) at the Same Time?

The short answer is yes -- you can technically maintain both a SEP IRA and a Solo 401(k) at the same time. However, doing so introduces contribution limit complications that often make the combination less advantageous than using a Solo 401(k) alone. Understanding the interaction between these two plans is essential before committing to a dual-plan strategy.

How Each Plan Works Independently

A SEP IRA (Simplified Employee Pension) under IRC Section 408(k) allows employer-only contributions of up to 25% of compensation (or 20% of net self-employment income for sole proprietors, after adjusting for self-employment tax). There are no employee deferrals -- every dollar comes from the employer side. The maximum contribution for 2026 is capped at $70,000 under IRC Section 415(c).

A Solo 401(k) under IRC Section 401(k) allows both employee deferrals (up to $23,500 for 2026, plus catch-up contributions) and employer profit-sharing contributions (up to 25% of compensation). The combined total is also capped at $70,000 under IRC Section 415(c), plus applicable catch-up contributions.

The Aggregation Problem

Here is where the complication arises. When you maintain both a SEP IRA and a Solo 401(k) for the same business, the contributions to both plans are aggregated for purposes of the IRC Section 415(c) annual additions limit. This means the total employer contributions across both plans -- plus any employee deferrals to the 401(k) -- cannot exceed $70,000 (or $77,500 with catch-up) in aggregate.

This aggregation effectively eliminates the benefit of having two plans. You cannot contribute $70,000 to the SEP IRA and another $70,000 to the Solo 401(k). The combined total across both plans is still capped at a single $70,000 limit. Because the Solo 401(k) alone can reach the same $70,000 limit through the combination of employee deferrals and employer contributions, adding a SEP IRA on top provides no additional contribution capacity.

Why the Solo 401(k) Is Usually Superior

When comparing the two plans head-to-head for a single self-employed business, the Solo 401(k) wins in almost every scenario. The Solo 401(k) allows employee deferrals, which means you can contribute $23,500 (or more with catch-up) regardless of your income level. A SEP IRA only allows percentage-based employer contributions, so you need substantial income to reach meaningful contribution levels.

For example, a self-employed individual with $100,000 in net self-employment income can contribute approximately $18,587 to a SEP IRA (20% of adjusted net earnings). With a Solo 401(k), the same person can contribute $23,500 in employee deferrals plus approximately $15,087 in employer contributions, for a total of $38,587 -- more than double the SEP IRA amount. The employee deferral component gives the Solo 401(k) a significant advantage at every income level below approximately $350,000.

When Dual Plans Make Sense

There are limited scenarios where maintaining both plans can be useful. If you have two separate and unrelated businesses -- for example, a consulting practice and a rental property management company -- each business may sponsor its own retirement plan. In that case, the IRC Section 415(c) limit applies separately to each employer, subject to controlled group and affiliated service group rules under IRC Sections 414(b), (c), and (m). If the businesses are not part of a controlled group, you may be able to contribute to both plans independently.

Another scenario involves transition planning. You may have established a SEP IRA years ago and are now switching to a Solo 401(k). During the transition year, you might have both plans in existence while you wind down the SEP IRA. This is permissible as long as total contributions do not exceed the Section 415(c) limit.

Converting a SEP IRA to a Solo 401(k)

Many self-employed individuals who started with a SEP IRA eventually convert to a Solo 401(k) as their income grows and they realize the 401(k) structure is more beneficial. The conversion does not require you to close or roll over the SEP IRA -- you simply stop contributing to it and begin contributing to the Solo 401(k). The existing SEP IRA balance continues to grow tax-deferred and can be rolled into the Solo 401(k) or a traditional IRA at any time.

One important consideration: if you plan to execute a Backdoor Roth IRA conversion, having a SEP IRA balance triggers the pro-rata rule under IRC Section 408(d)(2). Rolling your SEP IRA into your Solo 401(k) eliminates this problem because employer-sponsored plan balances are not included in the pro-rata calculation. This is a significant planning benefit of the Solo 401(k) over the SEP IRA for higher-income taxpayers.

The bottom line for most self-employed individuals is straightforward -- choose the Solo 401(k) and skip the SEP IRA. The Solo 401(k) offers higher contribution potential at most income levels, the flexibility of employee deferrals, a Roth option, loan provisions, and compatibility with Backdoor Roth conversions. The SEP IRA's only advantage is simplicity, and the Solo 401(k) is not significantly more complex to administer.

This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.