For self-employed people, however, a Solo 401(k) may offer greater annual contributions and bigger tax deductions than a SEP IRA, depending on your income. Nearly all brokerage firms offer SEP IRAs, and in most cases they can be opened online. Solo 401(k) vs. SEP IRA . This tax-advantaged retirement plan is generally limited to just self-employed individuals, though spouses who work at least part time for them may be eligible to contribute to one as well. Do You Need To Claim The Second Stimulus Check? SEP IRA vs. Solo 401 (k) Owners of small businesses have more choices today when it comes to saving for retirement. So this plan can be particularly advantageous for the self-employed. 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. IRA’s only allow a yearly contribution of $5,500 for individuals, or $11,000 for spouses, where SEP plans allow you to contribute up to $55,000 yearly. 401k Basics; IRA Basics ... A SEP IRA and a Roth IRA are two types of retirement accounts. In some cases, the tax deduction for a SEP IRA can be nearly 10 times that of an IRA. Many business owners will want to reinvest the majority of the business revenue in its initial growth years, not allowing the owner to contribute to retirement in the beginning years of the business. Unlike with a 401 (k) plan, there are no employee contributions. Schedule a FREE 30 minute call with him: You’ll need an Employer Identification Number, which you can obtain from the IRS if you don’t have one already. Any funds contributed to a 401(k) are not taxed until withdrawn in retirement. You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year; You had at least one plan participant who was a non-highly compensated employee; and. 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. For the 2021 tax year, up to $6,000 ($7,000 for employees age 50 or older). Whether you’re near retirement or a newly graduated high school student, there are plenty of options to consider to ensure you take the best options possible for retirement. One exception is Vanguard, which charges $20 a year, but the firm waives the fee for account balances of more than $10,000. Defined Benefit Plan Illustration in 60 Seconds! 401(k) vs. IRA: An Overview . I want to have both SEP & Roth 401K. He now writes The Red Tape Chronicles column at RedTape.Substack.com and hosts a podcast about the unintended consequences of technology. To help support our reporting work, and to continue our ability to provide this content for free to our readers, we receive compensation from the companies that advertise on the Forbes Advisor site. For more information on the differences between SEP-IRAs and Safe Harbor … Saving for retirement is one of the most important financial goals that we need to achieve in our lifetime. Schedule Appointment! Rather, it lets the self-employed and small businesses and their employees benefit from simple, tax-advantaged retirement savings accounts similar to personal individual retirement accounts (IRAs). By Kimberly Lankford , Contributor July 24, … Solo 401(k) accounts tend to offer a bit more flexibility in investment choices, too, Henry says. Owners of the small business can also offer a SEP IRA to their employees, and contribute up to 25% of the employees compensation to the account, allowing a small business to offer 401(k) like benefits. The main ones are a 401(k) plan, Simplified Employee Pension IRA known as the SEP IRA, or a Savings Incentive Match Plan for Employees IRA referred to as a SIMPLE IRA. Prior to any investment decision, please consult your tax, legal and investment professionals. There are several tax advantaged retirement plans out there. When a newly minted entrepreneur or gig worker lands at Henry’s door and asks whether to open an SEP IRA or a Solo 401(k), he asks one question: “Do you have any plans to hire an employee, even in the future?” If the answer is maybe, he steers them towards an SEP IRA, which can be used to fund employee retirements. French pilot Cherpin dies from injuries sustained in crash, organizers say… While SEP IRAs usually have a broader range of choices than 401(k) accounts, the choices are more limited than those available in a standard brokerage account. Traditional 401(k)’s have contribution limits of $19,500 (as of this writing) per year, where a cash balance plan allows you to contribute much more. Self-employment has many perks. As for those who are self-employed, I believe the limit is 20% of income to a SEP IRA vs. 25% to a solo 401k. SEP IRA vs solo 401k (tax questions) Retirement. A 401(k) plan is a retirement account offered by employers. The SEP IRA and Solo 401k are both business retirement plans. Hiring just one employee for your business in the future—beyond your spouse—would eliminate the Solo 401(k) as an option. Simplified Employee Pension (SEP IRA), Savings Incentive Match Plan for Employees (SIMPLE IRA), and Individual 401 (k) — sometimes called a solo 401 (k) or a self-employed 401 (k). © 2021 Forbes Media LLC. And the money you invest in them grows free of taxes. If you ran a small business with only one other employee who was not your spouse, then, you would not be eligible to save for retirement in a Solo 401(k). Hi all! There’s one key feature of SEP IRAs that differentiate them from Solo 401(k)s: Only the employer can make contributions to a SEP IRA account. Miller 4 Comments While completing my taxes in prior years, I started noticing that I would have a not insignificant tax bill due from self-employment and side project income unless I found a way to reduce my taxable income (especially with full-time … Small business owners may benefit more from a Cash Balance Plan because of the age dependent contribution limits. An employer can contribute a 25% maximum of an employee’s pay to a SEP-IRA.#4. 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. Does it mean I cannot contribute to both SEP IRA and Roth 401K, or I contributed too much to one of them? But if you’re self-employed with no employees, the choice depends on how much you plan to save. We will take a look here at how the plans differ. The coronavirus pandemic has only accelerated the trend toward self-employment. There are several retirement plan options a small business may want to consider. There are lower startup costs and operational costs for aa SEP-IRA compared to other retirement plans that would be considered “traditional.”#2. Planning for retirement is a task that is not worth procrastinating. 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. He focuses on cash balance plans and other defined benefit plans. But there are other factors to consider as well. Bob Sullivan is a Peabody-award winning journalist and the author of five books, including New York Times Best-Sellers, Gotcha Capitalism and Stop Getting Ripped Off! 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. Self-Employed Retirement Plan Comparison: SEP IRA vs Solo 401K vs SIMPLE IRA Last updated: January 14, 2021 G.E. Simply stated there are 2 primary advantages of the Individual 401k over the SEP IRA. The 401 (k) is an elective … For example, these plans are set up under different sections of the tax code. When comparing a SEP IRA to Solo 401(k), it’s important to know that business owners can make larger retirement contributions to a Solo 401(k) for a given level of compensation. Miller 4 Comments While completing my taxes in prior years, I started … What Happens If Your Employer Suspends Its 401(k) Program. These contribution limits will be specified in the Cash Balance Plan documents. Roger Wohlner December 29, 2020. For side-hustle workers who don’t pay withholding taxes and worry about their end-of-year tax bill, the deduction can really help. Both offer similar benefits, but their few key differences may make one better for you. The ranks of self-employed Americans are growing. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available. Each of these plans that can help you save for retirement.