Guide to the Solo401k vs. SEP IRA

Self-employment can offer an excellent work-life balance, as well as other freedoms and lifestyle benefits! Hahaha…wasn't that funny. Seriously though, self-employment will likely be the cause of you working 80 hours a week…ha! This obviously leaves a ton of time to research the Solo 401k vs SEP IRA.

The Most Significant Distinctions Between the SEP IRA vs Solo 401k

The term IRA stands for “Individual Retirement Account,” one of the two most standard retirement accounts that any individual can have. A SEP IRA stands for “Simplified Employment Plan” IRA. It's a retirement plan that is intended for businesses, and allows participation by owners and employees.

A 401k is the other most common retirement account, but is more commonly known as a plan available to employees through their job. A Solo 401k (also can be referred to as an individual 401k or self-employed 401k) is available to business owners and their spouses (if involved in the business).

What Are the Most Important Questions to Ask About the SEP IRA vs Solo 401k?

1. Is it Just You (and Your Spouse) or Do You Have Employee

SEP IRA – While this type of account can be utilized if you have a smaller amount of employees, I would not recommend it in that case. It is however a relatively easy-to-setup option for a “sole-owner-employee” business. Solo 401k – This type of account is available to business owners and their spouse only (if involved in the business). Partners and/or other employees are not permitted to participate in the plan. So basically, if you have partners or employees, you can't have this plan.

2. What Are the Contribution LIMITS for the SEP IRA vs Solo 401k (and Even More Significant…Contribution TYPES)?

SEP IRA – With this type of account, only the employer (you) can profit share (aka contribute) to the employee's (you and your spouse's) accounts, up to 25% of the total annual W2 income. Solo 401k – With this type of account, the employees (you and your spouse) can have pre-tax contributions taken from your W2 paycheck up to 19K/year (in 2019).

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