The reason for this is that a Solo 401k allows for both employee (salary deferral) & employer (profit sharing) contributions whereas only profit sharing contributions can be made to a Solo 401k. Securities and Advisory Services offered through Cantella & Co. Inc., Member FINRA/SIPC. It allows you to contribute toward your retirement savings while doing the same for your employees. A solo 401(k) or sole-participant 401(k) is a retirement plan designed for the self-employed who can sock away more than traditional or Roth IRA limits. Infographic: SEP IRA vs Solo 401(k) for Self-Employed Business Owners Simplified Employee Pension (SEP IRA) Overview and Eligibility Requirements. The SEP IRA does not allow catch-up contributions if you’re over 50, and it does not offer a Roth version, so if either of those is a dealbreaker, the SEP IRA won’t be for you. In 2019, as an employee, you can contribute up to $19,000 to your solo 401(k), and an additional $6,000 if you are at least age 50. Automatic contributions toward your employees’ plans can be a major selling point to attract the right talent. These are the same limits corporate 401(k) plans have. The only time it may be useful is if you have both a small business and other self-employed income. A SEP IRA is simple to administer and no tax filings are required. Sep-IRA vs Solo 401K If you work as an independent contractor, meaning you get a Form 1099 each pay period instead of a W-2, you’re responsible for your own benefits, including a retirement plan. Another important distinction between the SEP IRA versus the Individual 401k is the loan feature. Here's how the calculation works. SOCIAL SECURITY. A final point to consider is IRS rules do not permit loans with a SEP IRA. But they’re also allowed to open their own traditional or Roth IRAs. But you must fill out IRS form 5500-SF if your plan has more than $250,000. For the SEP IRA, your contributions are 20% of your income which means your business needs to earn at least $275,000 in income before you can max out your contributions. A SEP IRA or individual 401(k) can be set up as late as the due date (including extensions) for the business’s tax return for the year. Infographic: SEP IRA vs Solo 401(k) for Self-Employed Business Owners Simplified Employee Pension (SEP IRA) Overview and Eligibility Requirements. Max employee contribution: $19,500 plus a $6,500 catch-up if you are age 50 or over. A SIMPLE IRA allows both the employee and the small business owner or sole proprietor to make contributions. That’s due to the employees’ ability to make contributions to a Solo 401(k). The contribution limit calculation in an Individual 401k is important because it allows you to potentially save more than a SEP IRA at the same income level. A Safe Harbor 401(k) plan is a qualified retirement plan that is designed to meet non-discrimination requirements in a more simplified manner than a regular 401(k… SIMPLE IRA vs. SEP-IRA. This is the total amount the employee can personally contribute to all SEP, Roth, and traditional IRAs each year. A SEP IRA or individual 401(k) can be set up as late as the due date (including extensions) for the business’s tax return for the year. A SEP IRA and a 401k plan, then, have many similarities; they also have some significant differences. The Most Significant Distinctions Between the SEP IRA vs Solo 401k. By Kimberly Lankford , Contributor July 24, … Twitter. If you have a solo 401(k), you fund it on a pre-tax basis and your investments grow tax-free. In addition, you must begin taking required minimum distributions (RMDs) when you turn 70.5. Employers can offer a 401(k), a SEP IRA, or SIMPLE IRA, while individuals can set up a traditional or Roth IRA. A SEP IRA stands for “Simplified Employment Plan” IRA. The SEP IRA vs. Solo 401(k)–which is the best retirement plan if you’re self-employed? This is because they allow for a fixed $18,500 Salary Deferred portion, regardless of how much your business makes. You fund it with after-tax dollars, so it won’t reduce your taxable income. Not only can you make bigger contributions as an employee, but you can also make contributions as an employer. But which is right for you—the SEP or 401k PS? SIMPLE IRA. The Simplified Employee Pension Plan (“SEP”) IRA and the 401k Profit Sharing Plan (401k PS) are two of the most common retirement plans for successful small businesses and self-employed individuals, since they offer high contribution limits and flexible annual contributions. Beacon Capital Management Advisors is registered in all 50 States and is a branch office of Cantella and Co. Inc. © 2020 Beacon Capital Management Advisors. You’d most likely need to sign a plan adoption agreement and fill out an application. The conventional wisdom regarding the Solo 401(k) vs SEP IRA question is that self-employed people should choose the Solo 401(k) because in most cases, the potential tax savings are … Those who have full-time employees can save for retirement using a SEP IRA… A SEP IRA differs from a self-employed 401(k) plan with respect to the following features: Suitability: Both plans are available to small business owners and self-employed individuals. Employees in SEP IRA plans must have worked for the employer during three of the past five years and earned at least $550 in 2010. If you withdraw money from your account before turning 59.5 years old, the distribution would be taxed as ordinary income plus a 10% early withdrawal penalty. A SEP differs from other plans in that it allows contributions from employers only and resembles a profit-sharing plan. If you are a self employed individual or an owner and spouse business and are considering a SEP IRA or Individual 401k … If you’re in business for yourself, a financial advisor can help you with retirement planning. Simple IRA vs 401(k) vs Solo 401(k) vs SEP IRA. For example, if you made $15,000 of eligible compensation, you could sock all $15,000 of it away with a Self-Employed 401(k), but only $3,750 with a SEP IRA.” To me, this is the most … A SEP functions similarly to a traditional IRA. To calculate your contribution limits and allowable tax deductions accurately, you can use the worksheet on IRS Publication 560. In answer to your first question, the answer is generally yes. If you’re deciding between a solo 401(k) and a SEP IRA, and you have employees, the choice is easy: SEP IRA. THIS IS SUPER IMPORTANT. But this can be an expensive proposition since contributions for employees must match the percentage of the salary that the owner makes for themselves. Saving for retirement is one of the most important financial goals that we need to achieve in our lifetime. The following chart lays out the details of each of the retirement plans. Luckil… SEP IRA vs 401k: How SEP IRAs Compare. The funding of a SEP-IRA is entirely provided by employer contributions. How Much Do I Need to Save for Retirement? Miller 5 Comments While completing my taxes this year, I started … Evan Ross 4 min read. If you are the sole proprietor of a small business, you can choose between using a SIMPLE IRA or a SEP-IRA for yourself and your employees. Individual 401k plans have greater administrative responsibilities than a SEP, but may allow a larger annual contribution at identical income levels due to the way the annual contribution is calculated. The solo 401(k) and SEP IRA are two of the best retirement plans available for a small business owner – even a self-employed freelancer – looking to set up a professional caliber plan. The only con to a solo 401(k) is that it may involve a little more paperwork, so it’s only worth setting up if you’re looking to make large contributions to it. The IRS defines this as your net earnings from self employment minus one half of your self employment tax and the contributions you made to your plan as an employee. Moving forward, a solo 401(k) works like most retirement plans. This post will help you decide which to use. Retirement Savings for Freelancers: Solo 401(k) vs. SEP IRA How to choose the best tax-advantaged retirement savings plan if you’re self-employed. Solo 401(k) vs. SEP-IRA -- What’s the Best Option? In 2020 participants in an Individual 401k can contribute up to 100% of the first $19,500 ($26,000 if age 50 or older) of W-2 compensation or net self employment income for a sole proprietorship. If you don’t want to defer taxes, you may want to open a solo Roth 401(k) or a Roth IRA, depending on how much you can save. To help you make the right decision, we published studies on the. Jim Barnash is a Certified Financial Planner with more than four decades of experience. But your earnings are tax-free when you make qualified withdrawals. SEP IRA and 401(k) plan accounts are owned by the employee, who can choose between a range of investment options. Solo 401(k) Vs. SEP IRA. Employees must be at least 21 to participate in either of these these plans. If you don’t know where to begin to set up the plan the best fits your needs, a financial advisor can help. WhatsApp. IRAS. Based on the scope of your business, an SEP IRA may make more sense for your small business than a 401k or other retirement alternative. Small businesses have 3 basic retirement plan options today – 401k, SIMPLE IRAs, and SEP IRAs. Generally, employees must be allowed to participate if they're 21 or older, earn at least $600 in the tax year 2020 (or $650 in tax year 2021), and have worked for the same employer in at least 3 of the past 5 years. 401(k) vs. IRA: An Overview . Safe Harbor 401(k) Plan. Facebook. Solo 401k allows for higher annual contribution limits than a SEP IRA. Employer contribution limits: The … A SEP IRA is the right choice if you aren't in need of a loan and don't anticipate needing one in the future. Adam has been writing for The Motley Fool … Comparing Self-Employed Retirement Plans: Solo 401(k) vs. SEP IRA vs. SEP IRA vs. Solo 401K vs. It is only when you hire full-time employees that a SEP IRA makes sense. Taxes on contributions to a SEP IRA and a 401k, and on their earnings, are deferred until they’re paid out, and both incur significant tax penalties on any amounts withdrawn before age 59½. The simple answer to this question is that SEP IRAs are retirement accounts opened by freelancers while 401(k)s are retirement accounts administered by larger companies for their employees. SEP IRA vs. Solo 401(k) Owners of small businesses have more choices today when it comes to saving for retirement. To determine how much you can contribute based on your income use the interactive Individual 401k calculator. Most providers offer access to an array of funds with which you can build your SEP IRA portfolio. Solo 401(k)s and SEP IRAs are both alternative types of employer-sponsored retirement plans. SEP IRA and 401(k) plan accounts are owned by the employee, who can choose between a range of investment options. A solo 401(k) is a great option for a self-employed individual with no employees who can afford to save more than $6,000 a year, the traditional IRA limit. If you’re deciding between a solo 401(k) and a SEP IRA, and you have employees, the choice is easy: SEP IRA. Once you take the match away IRAs become far better than 401ks. Can you contribute to both a solo 401k and a SEP IRA in the same year? Look under “Retirement Plans for Small Businesses.”. All rights reserved. For a sole proprietor, this means that you can set up the plan and make contributions for a given year as late as April 15 of the following year (or October 15 of the following year if you filed for an extension). By. SIMPLE IRA SEP IRA; Who can contribute: Employee and employer. Note: Consider a defined benefit plan as an alternative to a SEP IRA or Individual 401k if you are self employed and would like to contribute more than the SEP IRA and Individual 401k contribution limits. SEP IRA vs. Solo 401k – Advantages of a Solo 401k. Simply stated there are 2 primary advantages of the Individual 401k over the SEP IRA. Have a question? Jim has run his own advisory firm and taught courses on financial planning at DePaul University and William Rainey Harper Community College. 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