Both SEP IRA, as well as solo 401(k), is two great retirement options for small business owners. Whether you’re a freelancer or a self-employed individual, you can also leverage their benefits.
The primary introduction of these two plans is to allow people to save money for their retirement plan so that they don’t face financial problems later in their life. These plans are super effective for people to save a significant amount of money while easing your tax burden.
In this article, we will discuss the differences between SEP IRA and solo 401(k) and discuss which one is the best option for you.
What are SEP IRA and Solo 401(k) Plans?
As per reports, less than 25 of small business owners with fewer than 11 employees pay attention to their retirement plans. The SEP IRA and the solo 401(k) plans are extremely capable of filling this gap. This way the small business owner can also provide for their employees. As per Investopedia, small business owners use SEP IRA.
Both these retirement plans can be implemented quickly. Unlike traditional plans, you don’t need to face any hassles.
The Key Differences
Even though both the solo401k and SEP IRA plans will help you save a significant as well as similar amount of money every year, there are some specific differences between these two plans. You need to determine which one works for you the best as per your requirements. Here are the key differences you need to know about the solo 401(k) and the SEP IRA plan.
The Rate of Contribution
Despite featuring similar yearly contribution limits, the solo 401(k) will allow you to save money quickest. The SEP IRA plan will allow you to save not more than 25% of your annual income. On the other hand, the solo 401(k) will allow you to save 100% of your annual salary. After that, you will be able to flip the contribution of the employer to 25%.
This feature of the solo 401(k) plan will undoubtedly prove super valuable if you have a part-time job in addition to your primary work. This way you can save money quickly. But remember that the maximum contribution limit per year applies to the total contribution, no matter how many solo 401(k) accounts you open.
Viability as Per the Number of Employees
This is another significant difference you need to know. Even though there’s an exception for the spouse who works in your small business, the solo 401(k) plan will fail to work if your business has employees. In such cases, you may shift your focus to SEP IRA, which will allow you to develop plans for multiple employees. If you’re planning to develop a plan for the employees, make sure you compare the SIMPLE IRA against the SEP IRA to determine the best one.
If you want your Roth plan to grow attractively in tax-free nature, make sure you choose the solo 401(k) plan as this is the only option that will prove beneficial. This plan will allow you to contribute on a pre-tax basis as well as an after-tax basis. On the other hand, the SEP IRA will come with restrictions as per the rules of traditional IRAs.
Now that you know the differences between solo 401(k) and SEP IRA, you won’t face problems determining the best one. Don’t forget to contact us and we will help you.