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Bernardbodo/Adobe Stock 6 min read Published September 21, 2022 Written by James Royal Written by James RoyalArrow RightSenior investing and wealth management reporter Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. James Royal Edited by Brian Beers Edited by Brian BeersArrow RightManaging editor Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Small business owners have several options to choose from when it comes to retirement planning. SEP IRAs were introduced as a way to let small business owners establish retirement accounts for their businesses. Financial legislation created the Solo 401(k), which also offers a simplified way for business owners to save for retirement and enjoy some of the benefits of an employer-sponsored 401(k) plan. A self-employed business can open a SEP IRA and a Solo 401(k) plan and contribute to both plans. Both are tax-deferred retirement strategies. The SEP-IRA allows individuals to save up to 25% of their income into the account. With a solo 401(k), individuals can save up to 100% as an employee contribution, up to the annual dollar threshold, and also gain employer contributions of up to 25%. Key Takeaways
SEP IRA vs. Solo 401(k)SEP IRASEP IRAs have been around for decades, and they are probably still the simplest way for business owners to save for retirement. These plans are purely profit-sharing in nature and allow owners to make contributions for themselves and all eligible employees. The amount that can be contributed is the lesser of up to 25% of business revenue—20% in the case of a sole proprietorship or a single-member limited liability corporation—: $61,000 for 2022 and $66,000 for 2023. One of the main advantages of SEPs is their relative simplicity compared with the rigorous reporting requirements that come with qualified plans, even those that are designed for self-employed persons, such as Keogh plans. SEP IRAs do allow employers to make retirement plan contributions on behalf of employees, though they are allowed to exclude part-time workers, those under age 21, and those who have not worked for the employer in at least three of the previous five years. Contribution limits are the same as for the owner, except that it is the lesser of the dollar limit or 25% of the employee’s total compensation. SEP IRAs can also be established at any time before the business owner files a tax return. Solo 401(k)Solo 401(k) plans are a relatively recent addition to the retirement plan community. These plans are designed exclusively for sole proprietorships that have only one employee (the owner). Also known as an “individual” or “self-employed” 401(k) plan, this type of retirement savings account is generally considered a better option for solo practitioners than a SEP IRA because it also offers the following features:
Solo 401(k) contributions must be made by Dec. 31 of the previous year to be counted on the tax return. Solo 401(k) vs. SEP IRA: Key DifferencesAccount TypeEmployer ContributionEmployee ContributionCatch-Up ContributionsRoth ContributionsLoan ProvisionEstablishment RequirementOperational RequirementsSEP IRAYesNoNoNoNoAnytime before filing tax returnRelatively simpleSolo 401(k)YesYesYesYesYesDec. 31 of the tax yearRigorous reporting requirements Which Should I Choose?Owners of small businesses have more choices today when it comes to saving for retirement. Those who have full-time employees can save for retirement using a SEP IRA, while solo practitioners can choose between that and a solo 401(k) plan that has higher contribution limits and other advantages. For more information on retirement plans and accounts, download Publications 575, 590-A, and 590-B from the IRS website, or consult your financial advisor. Can you have a SEP IRA and a 401k at the same time?If both a 401(k) plan and a SEP IRA are offered by the same business, business owners can contribute to both plans simultaneously, however contributions between the two plans are limited to the maximum of 25% of compensation or up to $61,000 (whichever is lesser).
Can I have a self employed 401k and an IRA?As long as your modified AGI is not over a certain limit, you can also make Roth IRA contributions in addition to making Roth Solo 401k contributions.
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