Contributing to SEP IRA and Solo 401k in the same year - is it allowed with an S Corp?

You can't contribute to both a SEP IRA and Solo 401k as an employer for yourself from the same business in the same tax year. The IRS doesn't allow you to double-dip on the employer contribution side. You need to choose which plan works better for your situation. For your specific scenario, the Solo 401k is likely more advantageous. Here's why: With a Solo 401k, you can make both employer contributions (up to 25% of compensation) AND employee contributions (up to $22,500 for 2023, plus $7,500 catch-up if you're 50+). The SEP IRA only allows employer contributions. Regarding your spouse - yes, if she becomes a legitimate employee of your S Corp with reasonable compensation, she could establish her own Solo 401k and make both employee and employer contributions based on her salary. This could significantly increase your household retirement savings.

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Just wanted to follow up - I tried https://taxr.ai after seeing this thread and it was incredibly helpful! They analyzed my S Corp setup and showed me exactly how to structure my retirement contributions between my Solo 401k and other accounts. They confirmed what others mentioned here about not being able to make employer contributions to both a SEP IRA and Solo 401k for the same business, but they also identified a strategy for maximizing my contributions that I hadn't considered. The documentation they provided made everything crystal clear, and I feel much more confident about my retirement strategy now. Definitely worth checking out if you're getting confused by conflicting information online!

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Something important to consider that nobody's mentioned yet - timing of when you establish these accounts matters a lot. For a Solo 401k, you need to establish the plan before December 31st of the tax year, even though you have until your tax filing deadline to make contributions. SEP IRAs can be established and funded up until your tax filing deadline (including extensions). This gives you more flexibility if you're reading this late in the year. Also, if your spouse is going to work for the company, make sure it's a legitimate employment relationship with reasonable compensation or the IRS might challenge the arrangement.

Has anyone considered the mega backdoor Roth option with a Solo 401k? If you set up your Solo 401k plan document to allow for after-tax contributions and in-plan Roth conversions, you could potentially contribute even more money toward retirement. With your income level, this could be a great way to get more money into tax-advantaged accounts, especially if you're maxing out other contribution options.

One thing that might help clarify the SEP IRA vs Solo 401k question - you can actually convert your existing SEP IRA to a Solo 401k if your Solo 401k plan allows for rollovers. This could be beneficial since you'd get the employee contribution option ($22,500) that you don't have with the SEP IRA. However, be careful about the timing if you've already made SEP IRA contributions for this tax year. You can't make employer contributions to both plans for the same tax year from the same business, even if you do a rollover partway through. Also worth noting - with your S Corp structure and $145k salary, your total contribution space to a Solo 401k would be around $58,750 ($22,500 employee + ~$36,250 employer at 25% of compensation). This might actually be less than the $66k you were planning for the SEP IRA, so run the numbers carefully before switching.

One additional consideration that hasn't been mentioned - if you're planning to hire employees in the future (beyond just your wife), a SEP IRA requires you to contribute equally for all eligible employees as a percentage of their compensation. With a Solo 401k, you lose eligibility once you have employees who aren't your spouse. Given your business growth trajectory ($850k-$1.2M revenue), you might want to think about whether you'll need to hire W-2 employees down the road. If so, you might want to consider other options like a traditional 401k plan that can accommodate employees, or carefully structure any future hires as contractors rather than employees. Also, make sure you're considering state tax implications. Some states don't follow federal rules exactly for retirement plan deductions, so the optimal choice might vary depending on where your S Corp is based. The timing issue others mentioned is crucial - if you're already late in 2023, the SEP IRA's flexibility to be established until your filing deadline might outweigh the Solo 401k's higher contribution potential, especially if you can't increase your salary before year-end.