Can I contribute to both a solo 401(k) and a traditional IRA in 2025, and what are the limits?
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Yes, you can contribute to both a solo 401(k) and a traditional IRA in 2025, provided you have sufficient earned income to support the contributions. However, there are important rules and limits to consider for each account, as well as how participation in both affects your tax deduction for traditional IRA contributions.
1. Solo 401(k) Contribution Limits for 2025
A solo 401(k) (also known as an individual 401(k)) is a qualified retirement plan for self-employed individuals or business owners with no employees other than a spouse. Contributions can be made in two capacities:
- Employee Deferral: You can contribute up to $23,500 as an employee in 2025. If you are age 50 or older by the end of 2025, you can make an additional catch-up contribution of $7,500, for a total of $31,000 in employee deferrals. (Note: For those age 60-63, a higher catch-up limit of $11,250 applies, but this is specific to certain plans and circumstances.)
- Employer Contribution: As the employer, you can also contribute up to 25% of your net self-employment income (after deducting half of your self-employment tax and the employer contribution itself), subject to an overall limit.
- Overall Limit: The total combined contribution (employee + employer) cannot exceed $70,000 for 2025.
2. Traditional IRA Contribution Limits for 2025
- Annual Limit: You may contribute up to $7,000 to a traditional IRA in 2025. If you are age 50 or older by the end of 2025, you can contribute an additional $1,000, for a total of $8,000.
- Compensation Requirement: Your total IRA contribution cannot exceed your taxable compensation for the year.
- Spousal IRA: If you are married and file jointly, and your spouse has little or no income, you may also contribute up to $7,000 (or $8,000 if age 50+) to a spousal IRA, subject to the couple’s combined compensation.
3. Deductibility of Traditional IRA Contributions
- Active Participant Status: If you contribute to a solo 401(k), you are considered an "active participant" in an employer-sponsored retirement plan for the year.
- Income Phase-Outs: The deductibility of your traditional IRA contribution depends on your modified adjusted gross income (MAGI) and your tax filing status:
- Single or Head of Household: Deduction is phased out for MAGI between $79,000 and $89,000 in 2025.
- Married Filing Jointly (if you are covered by a plan): Deduction is phased out for MAGI between $126,000 and $146,000 in 2025.
- Married Filing Jointly (if only your spouse is covered): Deduction is phased out for MAGI between $236,000 and $246,000 in 2025.
- Married Filing Separately: Phase-out is $0 to $10,000.
- Nondeductible Contributions: If your income is above the phase-out range, you can still make a nondeductible contribution to a traditional IRA, but you will not receive a current-year tax deduction. Earnings will grow tax-deferred, and you must track your basis using Form 8606.
4. Coordination of Limits
- Solo 401(k) and IRA Limits Are Separate: The contribution limits for a solo 401(k) and a traditional IRA are independent. Contributing the maximum to one does not reduce the limit for the other, as long as you have enough earned income to support both contributions.
- Aggregate Limits: If you have multiple 401(k) plans (e.g., from different employers), the employee deferral limit ($23,500) is a combined limit across all plans. However, the employer contribution and overall limit apply per plan, subject to the 100% of compensation and $70,000 cap.
5. Practical Considerations
- Prioritization: Taxpayers are generally advised to maximize contributions to employer-sponsored plans (to capture any employer match), then to HSAs (if eligible), then to IRAs (deductible or Roth, if eligible), before considering nondeductible IRA contributions or additional taxable investing.
- Nondeductible IRA vs. Taxable Account: If you are ineligible for a deductible IRA or Roth IRA, a nondeductible IRA may be preferable to a taxable account for tax-inefficient investments, as earnings grow tax-deferred, but withdrawals of earnings are taxed as ordinary income and are subject to early withdrawal penalties unless an exception applies.
6. Summary Table of 2025 Limits
Note: All contributions are subject to earned income and plan rules. IRA deductibility is subject to MAGI phase-outs if you are an active participant in a retirement plan.
In summary: You can contribute to both a solo 401(k) and a traditional IRA in 2025. The solo 401(k) limit is up to $70,000 (including both employee and employer contributions), and the traditional IRA limit is $7,000 ($8,000 if age 50+). However, if you participate in a solo 401(k), your ability to deduct your traditional IRA contribution may be limited or eliminated depending on your income and filing status. If you exceed the income limits for a deductible IRA, you can still make a nondeductible IRA contribution.
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