Solo 401 (k) vs Sep-IRA: which is better?


What would you like to know

  • Solo 401 (k) are limited to business owners and spouses involved in the business. SEP-IRAs can include employees.
  • The Solo 401 (k) allows employee contributions as well as a Roth option.
  • SEP-IRAs can be opened and funded up to the business tax filing date, including extensions.

You know the importance of having a pension plan in place for your independent clients. Two key plans to consider are the SEP-IRA and the Solo 401 (k). Determining the best choice for your client will depend on their situation.

What is a SEP-IRA?

SEP stands for Simplified Employee Retirement. A SEP-IRA is a type of traditional individual retirement account. SEP-IRA contributions are paid only with employer contributions; no employee contribution is authorized.

If there are employees in the business, you should pay the same percentage of compensation into their accounts as you pay into yours. It can get expensive, and for this reason, a SEP-IRA may not be the best retirement plan option for a business with employees. This is a solid option for those who are self-employed and have no employees in the company, or who have only a small number of employees that they are comfortable contributing to.

Benefits of a SEP-IRA

Contributions to a SEP-IRA can be up to 25% of earnings, including self-employment income, up to a maximum of $ 58,000 for 2021. This percentage may be lower for a taxpayer in the United States. ‘appendix C because of the way the calculation works,. A SEP-IRA can be opened and financed up to the due date of the business tax return, including any extensions.

Disadvantages of a SEP-IRA

One potential downside is that Roth accounts are not available with a SEP-IRA. Since contributions are based on a percentage of income for the year, if your client has a low year in terms of earnings, their ability to contribute for the year will be limited. Also, off plan loans are not available with a SEP-IRA.

What is a Solo 401 (k)?

A Solo 401 (k), also known as Individual 401 (k), is a retirement plan reserved for business owners, spouses involved in the business, and business partners. Employee contributions are allowed at the same level as a 401 (k) through an employer. For 2021, these levels are $ 19,500 plus a catch-up contribution of $ 6,500 for people aged 50 and over.

In addition, employer profit-sharing contributions of up to 25% of the remuneration may be paid. This brings the maximum total contribution to $ 58,000; the maximum is $ 64,500 for people aged 50 or over for 2021.

Benefits of a Solo 401 (k)

Depending on the custodian chosen, a Roth option may be available for employee contributions, but not for employer profit-sharing contributions. Likewise, diet loans can be an option. The employee deferral option allows clients to contribute up to the maximum deferral amounts of $ 19,500 or $ 26,000 as long as their compensation is at least at these levels.

By comparing the two plans, if maximum salary deferrals are made, the Solo 401 (k) can generally be maximized in terms of total contributions at a lower pay level than a SEP-IRA.

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