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Is a solo 401( k) far better than a SEP Individual Retirement Account?

I like SEP IRAs and have actually suggested them to particular customers. Like the solo 401( k), you can contribute up to $52,000 right into a SEP Individual Retirement Account per year, however your income needs to be substantially higher to obtain to that level of funding.

Jill is a realtor without employees and also her company is structured as a single proprietorship. Her company earnings, or web Schedule C, in 2015 was $130,000. She is over 50 and also does not have sufficient saved for retirement. Her hubby additionally makes a good living as well as their youngest child just recently finished college as well as they now have considerable optional earnings to catch up on their retirement cost savings. If Jill were to open a SEP Individual Retirement Account to save with her organisation, the IRS would certainly make her use the adhering to computation:

( Internet schedule C - 1/2 of self-employment tax obligation) x 20% =

In Jill's instance, that would be ($130,000 -$8,790.20) x. 2 = $24,241.96. If Jill were to open up a solo 401(k), she can contribute $17,500 for herself plus the $24,241.96 commercial sharing (exact same amount as SEP above) and also add the $6,500 catch up arrangement because she is over 50. That is an overall of $48,241.96 in the Solo 401(k) and also only $24,241.96 for a distinction of over $24,000! Please keep in mind the catch up is above as well as past the $52,000 limit. SEP IRAs do not enable over 50 catch ups.

For someone around that earnings degree, the solo 401(k) can really aid defer more loan. Solo 401(k)s also enable proprietors to open up a Roth 401(k). At this time, there is no Roth SEP. When you have an equilibrium of over $250,000 in your Solo 401(k), you are required to file a type 5500 EZ yearly.

What entities can establish a solo 401(k)?

Sole proprietorships, Companies, llcs, and also collaborations can all set up solo 401(k)s. If your organisation is a firm, you must pay on your own W2 incomes to be able to add to a solo 401(k).

When must I develop a solo 401(k) strategy?

The plan files need to be signed by 12/31. Often, I don't fulfill people up until the year mores than solo401k.com and also it is too late to establish a solo 401(k) plan. In this instance, it is feasible to establish a SEP IRA just before the tax filing target date. Company strategies are flexible as well as it is very important to bear in mind that you can terminate your plan and select a various strategy in the future. Both the SEP and also solo 401(k) permit you to make big payments when you have the revenues in one year and do not require contributions if you have lean years.

How do I determine my self-employment tax?

The easiest way is to fill out Schedule SE with your 1040 or utilize a self-employment tax calculator.

What else should I be aware of?

Solo 401(k)s are designed for businesses where there is just one person functioning in the service. Some of the guidelines connected to solo 401(k) strategies can be complex.


Like the solo 401( k), you can add up to $52,000 into a SEP IRA per year, but your income must be considerably higher to obtain to that level of funding. If Jill were to open up a solo 401(k), she could add $17,500 for herself plus the $24,241.96 for earnings sharing (exact same amount as SEP over) as well as add the $6,500 catch up stipulation because she is over 50. Solo 401(k)s also permit proprietors to open up a Roth 401(k). Both the SEP and also solo 401(k) allow you to make big contributions when you have the profits in one year and also do not require contributions if you have lean years.

Solo 401(k)s are created for organisations where there is only one person working in the company.