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. Beacon Capital Management Advisors is registered in all 50 States and is an Accredited Business of the Better Business Bureau since 2004. But you must fill out IRS form 5500-SF if your plan has more than $250,000. Ask our Retirement expert. Other retirement plans, such as Traditional IRAs and 401(k) plans, can be rolled over into a SEP-IRA. By. 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. 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. Miller 5 Comments While completing my taxes this year, I started … Securities and Advisory Services offered through Cantella & Co. Inc., Member FINRA/SIPC. And the money you invest in them grows free of taxes. Compare the Top 3 Financial Advisors For You, 25% of your compensation (with a $280,000 ceiling for the calculation), They’ve worked for you during three of the last five years, They’ve earned at least $600 from you in the past year. Jim has run his own advisory firm and taught courses on financial planning at DePaul University and William Rainey Harper Community College. 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. Simple IRA vs 401(k) vs Solo 401(k) vs SEP IRA. But if you’re self-employed with no employees, the choice depends on how much you plan to save. A SEP-IRA is a Simplified Employee Pension plan that offers retirement savings benefits for employers and their employees. To determine how much you can contribute based on your income use the interactive Individual 401k calculator. Not only can you make bigger contributions as an employee, but you can also make contributions as an employer. 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. INDIVIDUAL 401(K) No common-law employees. Roger Wohlner says October 4, 2013 at 9:03 pm. 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. Evan Ross 4 min read. For a sole … Your two main choices are a SEP-IRA or a Solo 401K. That’s due to the employees’ ability to make contributions to a Solo 401(k). If this sounds like you then keep it simple and set up a SEP IRA. They are IRA, Simplified Employee Pension aka SEP, a Keogh Plan, or a 401k plan. 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 401(k) Owners of small businesses have more choices today when it comes to saving for retirement. This includes sole proprietors, partnerships, C and S corporations, and the self-employed. In addition, a profit sharing contribution can be made up to 25% of W-2 wages or 20% of net self employment income. ForUsAll 401k Blog — Retirement Plan Types: 401(k) vs SEP IRA, SIMPLE IRA, and Solo 401(k) Share this . A SEP differs from other plans in that it allows contributions from employers only and resembles a profit-sharing plan. WhatsApp. But you should put at least some of it in retirement savings. Otherwise, no age or service restrictions. 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. However, they have their own unique benefits. 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. Both the SEP IRA and the Solo 401K are self-employed retirement plans. SOCIAL SECURITY. First, you have to know what it is. As detailed above, the Solo 401(k) is the far superior option for the self-employed. SEP IRA vs. Solo 401(k) Owners of small businesses have more choices today when it comes to saving for retirement. But if this proves to be more expensive than beneficial, you can set up a solo or individual 401(k) plan for your business. Twitter. Photo credit: ©iStock.com/StockRocket,/©iStock.com/designer491, ©iStock.com/Nuthawut Somsuk. They’re the very best plans available for the self-employed, especially if you’re a sole practitioner. Linkedin. But they’re also allowed to open their own traditional or Roth IRAs. Facebook. For self-employed people, I agree that unless you want to tax shelter money over and above the standard contribution of the 401k, you’re better off with the SEP IRA. Since you are your own boss, youare responsible for both starting your own plan and funding it. Small businesses have 3 basic retirement plan options today – 401k, SIMPLE IRAs, and SEP IRAs. The deadline for contributions is the same date. Can you contribute to both a solo 401k and a SEP IRA in the same year? Employee and employer. The option of a tax free loan using the balance of the plan as collateral via an Individual 401k loan. SEP-IRA vs. Solo 401(k) SEP-IRA: Solo 401(k) Who can contribute? A SEP IRA is simple to administer and no tax filings are required. When you work for an employer, you can usually count on there being a 401(k) plan or something similar already in place that you can contribute to. You can’t open a solo 401(k) plan if … SEP-IRA. Adam has been writing for The Motley Fool … 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. This post will help you decide which to use. What’s more, those employer contributions much match the percentage of compensation you contribute toward your own. Solo 401k allows for higher annual contribution limits than a SEP IRA. It is important to note that you can set up a SEP IRA and convert to an Individual 401k in the future if you change your mind and either want to receive an Individual 401k loan or if you want to contribute more than the calculations of a SEP IRA will allow. An Individual 401k loan may be considered a valuable feature to some self employed business owners. 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 … 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. 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. Those who have full-time employees can save for retirement using a SEP IRA… A final point to consider is IRS rules do not permit loans with a SEP IRA. The deadline for contributions is the same date. How Much Do I Need to Save for Retirement? Reply. However, you enjoy some perks you won’t get with a traditional IRA. For many successful business owners the decision of which retirement plan to choose comes down to either a SEP IRA or Individual 401k. INDIVIDUAL 401(K) For the 2020 tax year, $19,500 ($26,000 for employees age 50 or older). But again, with these issues I wouldn’t leave anything to chance. Your two main choices are a SEP-IRA or a Solo 401K… SEP IRA and 401(k) plan accounts are owned by the employee, who can choose between a range of investment options. Everyone’s personal situation is different and there is no single definitive superior retirement plan for every individual who earns self-employment income. So if you contribute 20% of your compensation toward your own SEP IRA, you must also contribute 20% of each eligible employee’s compensation to his or her individual plan. The SEP IRA vs. Solo 401(k)–which is the best retirement plan if you’re self-employed? If you don’t know where to begin to set up the plan the best fits your needs, a financial advisor can help. But this can be an expensive proposition since contributions for employees must match the percentage of the salary that the owner makes for themselves. SEP IRA vs. Solo 401k – Advantages of a Solo 401k. We provide more information about them on our website www.definedbenefitplan.com. SEP IRA vs 401k: How SEP IRAs Compare. $13,500 plus a $3,000 catch-up if you are age 50 or over. The Individual 401k and the SEP IRA have comparable maximum limits, but due to the way the contribution is calculated a self employed individual may be able to contribute more into an Individual 401k versus a SEP IRA at the same income level, therefore maximizing retirement contributions and valuable tax deductions. Self-employment has many perks. The term IRA stands for “Individual Retirement Account,” one of the two most standard retirement accounts that any individual can have. This is to tune of up to 25% of your compensation. The IRS taxes your distributions when you make qualified withdrawals in retirement. Potentially greater retirement contributions at the same income level, therefore maximizing retirement contributions and valuable tax deductions. If you are a self employed individual or an owner and spouse business and are considering a SEP IRA or Individual 401k reading this information should help you make your decision easier by explaining the differences simply. Each of these plans that can help you save for retirement. Bank of America® Travel Rewards Visa® Credit Card Review, Capital One® Quicksilver® Cash Rewards Credit Card Review, 7 Mistakes Everyone Makes When Hiring a Financial Advisor, 20 Questions to Tell If You're Ready to Retire, The Worst Way to Withdraw From Your Retirement Accounts. (Employers can also choose less restrictive requirements.) Solo 401k plans for 2020 enable a business owner to put 100% of income away to a … That’s the document designed to paint a financial and compliance. Contributions to a defined benefit plan are dependent on an individual’s age and income, but can potentially be $60,000 to $200,000 or more a year. A solo 401(k) functions much like its corporate counterpart. The funding of a SEP-IRA is entirely provided by employer contributions. If you value the loan feature or want to maximize your annual retirement contributions then you should consider an Individual 401k. You can construct one with various investment options including the following: In addition to having high contribution limits, a SEP IRA allows you to deduct all your employer contributions when calculating your business taxes. 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. The SEP IRA is a type of a Traditional IRA… A SEP provides high maximum contribution limits, but an Individual 401k may allow a greater contribution at the same income level. To help you make the right decision, we published studies on the. 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. 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 -- What’s the Best Option? 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. You can open a solo 401(k) through most financial institutions and online brokers. Employees must be at least 21 to participate in either of these these plans. 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, … IRA vs 401k: Understanding the difference between the two. Solo 401(k) vs. SEP IRA . Learn more about an Individual 401k loan. What’s more, you can double that amount if your spouse also earns income from your business. If you have questions or need advice contact us. It’s a retirement … But your earnings are tax-free when you make qualified withdrawals. THIS IS SUPER IMPORTANT. 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… A SEP IRA stands for “Simplified Employment Plan” IRA. This ensures that the government starts receiving taxes on your savings. You can open one only if you and your spouse are the only employees in your business. 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. Also, there is no rule  stopping you from making additional contributions to a traditional IRA or Roth IRA for  yourself, though the amount you can claim as tax-deductible may be limited. This is because they allow for a fixed $18,500 Salary Deferred portion, regardless of how much your business makes. Jose Hernandez-July 19, 2020. SIMPLE IRA. 401(k) vs. IRA: An Overview . The Solo 401(k) and the SEP-IRA are two popular options for folks who are self-employed. It allows you to contribute toward your retirement savings while doing the same for your employees. What level of self-employment income do you earn? There are several tax advantaged retirement plans out there. Comparing Self-Employed Retirement Plans: Solo 401(k) vs. SEP IRA vs. SIMPLE IRA. Employer contributions are optional. The SEP IRA and Individual 401k are the two most common retirement plans chosen by successful self employed individuals and owner and spouse businesses due to their high contribution limits and flexible annual contributions. Employer only; must contribute for all eligible employees. Have a question? You fund it with after-tax dollars, so it won’t reduce your taxable income. Automatic contributions toward your employees’ plans can be a major selling point to attract the right talent. Simply stated there are 2 primary advantages of the Individual 401k over the SEP IRA. The Most Significant Distinctions Between the SEP IRA vs Solo 401k. So which type of retirement plan makes the most sense for you? You can’t open a solo 401(k) plan if you have an employee other than your spouse. But which is right for you—the SEP or 401k PS? All profit sharing contributions must be made to a traditional account. IRAS. This earning requirement also applies to 2011. 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. SEP-IRA. You just need your employer identification number to apply. You can start small with a traditional IRA or a Roth IRA. 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. 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. To help choose the right plan for your business, you need to understand their features and match them to … 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. A simplified employee plan (SEP) IRA is a type of IRA that works well for the self-employed or the small business owner. 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