Employers may offer a simplified employee pension individual retirement arrangement as well as a 401(k) plan to their employees. SEP IRAs and 401(k) plans both have specific limits on how much you and your employer can contribute. Because SEP IRAs and 401(k) plans are both defined contribution plans, however, they are subject to cumulative contribution limits.
401(k) Contribution Limits
Your contributions to your 401(k) plan cannot exceed the annual limit or 100 percent of your earnings from the job. As of 2013, the limit is $17,500 if you're under 50 or $23,000 if you're 50 or older. If you make $12,000 at your job that offers the 401(k) plan, you could only contribute $12,000 because your compensation is smaller than your contribution limit.
Employee SEP IRA Contributions
If you're an employee of a company that offers a SEP IRA, your contributions count toward your traditional IRA contribution limit rather than the limit for defined contribution plans. For example, as of 2013, you can contribute up to $6,500 if you're 50 or older, or $5,500 if you're younger than 50. If you're self-employed, you can make contributions as both an employee and as the employer, but you must specify how each contribution is to treated.
Employer SEP IRA Contributions
The money that your employer contributes to a SEP IRA on your behalf can't exceed 25 percent of your compensation. If you're self-employed, you can't contribute more than 20 percent of your net self-employment earnings. However, neither your employer nor you as a self-employed individual can contribute more than $51,000 to your SEP IRA as of 2013.
Total Contribution Limits
The IRS limits the total amount that can be contributed to your SEP IRA and your 401(k) plan by both you and your employer. As of 2013, the limit is $51,000 if you are under 50 and $56,000 if you are 50 or older. This limit includes your contributions to your SEP IRA as an employer (or your employer's contributions on your behalf) plus both your contributions and your employer's contributions to your 401(k) plan. For example, suppose you're under 50, self-employed and also work for a company that offers a 401(k) plan. If you contribute $10,000 to your 401(k) plan and your employer contributes $10,000, you can contribute up to $31,000 to your SEP IRA as an employer contribution.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."