Retirement Plan Options for Self-Employed Individuals: SEP IRA vs. Solo 401(k)

A self-employed individual has to plan retirement in a very careful manner because, to make decisions, they have to look at their financial needs. You can make big plans for your retirement as you can enjoy options like SEP IRA and Solo 401(k).

These plans can be done in such a way that you can save the most. It can be difficult to know which plan is best for your business and your long-term goals. It is always important to keep your retirement future safe by ensuring that you stick to the set financial rules.

If you have a problem making the best plan for your future, you can get help from expert teams like Houston 401k audits. In this article, you will learn about the main differences between SEP IRA and Solo 401(k) so that you can make the best decision for you.

Understanding the SEP IRA: A Simplified Option for Entrepreneurs

The SEP-IRA (Simplified Employee Pension Individual Retirement Account) is a straight retirement plan that is best for people who are self-employed and are owners of small businesses.

High Contribution Limits

SEP IRA gives you up to 25% of the money you earn or a maximum of $66,000 per year. This policy of the SEP IRA was made in 2023.

Employer-Only Contributions

Only the employer gives money to the SEP IRA, which makes it simple to manage. This can be a benefit for single owners. However, this may not be the best idea if you plan to hire employees because contributions should be equal for all.

Ease of Administration

The process is very simple because it needs very little paperwork, and there is no need for annual filing requirements. This makes it easy to administer.

Who Should Consider the SEP IRA?

This plan is best if you are looking for a retirement solution that has no worries, has high annual contribution limits, and there are tax-deductible contributions to decrease taxable incomes.

Solo 401(k): A Versatile Plan with Dual Contributions

The Solo 401(k) is made for people who are self-employed without full-time employees and gives more flexibility, making it possible to make more savings.

Dual Contribution Streams

In Solo 401(k), both the employer and employee give money. Employees give up to $22,500 every year or $30,000 for those employees who are aged 50+. Employers give up to 25% of the money they earn.

Roth Option

Solo 401(k) gives a Roth account for contributions that happen after tax, which is not the case with SEP IRA, and it makes it easy for you to get tax-free withdrawals during retirement.

Loan Provision

Borrow up to 50% of your account balance, capped at $50,000, which will make it easy for you to cover short-term rules in times of emergencies.

Ideal Candidates for Solo 401(k)

This plan is best for you if you are self-employed, have a high income, and want to get the most savings. It is also a good option for entrepreneurs who may benefit from Roth contributions and for people who want to make the process of getting funds flexible.

Key Differences Between SEP IRA and Solo 401(k)

While both plans give growth with tax benefits, they are different in structure and benefits. These differences can be the contribution flexibility, Roth option, and loan availability.

Contribution Flexibility

In SEP IRA, only the employers give money, but in Solo 401(k), both the employee and employer can give money that will be saved and can be used by them in the future after their retirement.

Roth Option

SEP IRA does not feature any Roth accounts, but Solo 401(k) has a Roth account from which you can take out money after your retirement, and it will be free of tax.

Loan Availability

SEP IRA does not have any option to give you a loan, but Solo 401(k) has a loan option that will help you get loans up to $50,000 for your financial flexibility.

Take Action: Secure Your Financial Future Today

Are you ready to plan for retirement? Now is the time to have your income and savings checked so that you can make the best retirement plans to help you in the future. Begin building a solid financial foundation now so that you’ll have a peaceful and secure retirement tomorrow.