I started a SEP IRA with Schwab and have put 25% of my money into it. He spent nearly two decades working at MSNBC.com and NBC News, and he still appears on TODAY, NBC Nightly News, and CNBC. Both accounts allow for people to sock away large amounts of pre-tax income — as of 2018, both SEPs and 401(k)s permit individuals to deposit 25% of their income, or $55,000, … The SIMPLE IRA contribution limit is $13,500 with a catch-up limit of $3,000. Opening a Solo 401(k) may be somewhat trickier and more time consuming. Any business with one or more employees is eligible for a SEP IRA, including freelance workers and independent contractors. While the SEP IRA and SIMPLE IRA look a lot like traditional 401 (k) programs, they differ in important respects from that as well as from each other. To put it simply, a 401(k) plan is a retirement account offered by employers allowing employees of the company to contribute a portion of their paycheck to retirement. If the same worker were 50 or older, they could add $6,500 on to that total. Congress created the Simplified Employee Pension Individual Retirement Account (SEP IRA) in 1978 to extend the IRA concept to small businesses. 401(k)s are the most common type of plan. Let the battle begin. Even though both the 401k and the SEP IRA reduce my taxable income, I would still get an overall better return if I continued buying cash flowing rental properties with it. 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. But that’s not the only reason to pick a Solo 401(k). Among the many retirement options are qualified benefit plans offered by most employers. The reason for the penalty is to encourage people to save for retirement and not withdraw the funds until the stated retirement age. The main ones are a 401(k) plan, Simplified Employee Pension IRA known as the SEP IRA, or a Savings Incentive Match Plan for Employees IRA referred to as a SIMPLE IRA. Most major brokerages offer step-by-step instructions on their websites. So in the battle of the SEP IRA vs 401k there are many pros and cons. 401(k) Advantages over SEP and SIMPLE IRAs. Eligible startup costsYou may claim the credit for ordinary and necessary costs to: Eligible tax yearsYou can claim the credit for each of the first 3 years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective. Schedule a FREE 30 minute call with him: In Turbotax, when I checked "max contribution" box for SEP, it showed -$7736 on Retirement Deduction Results page, but when I put in same amount manually, it does not. Traditional 401(k) plans also have tax advantages. The main differences between the three retirement vehicles mentioned above, are going to be the tax benefits and who they are designed to work for. 401(k) vs. IRA: An Overview . Now, if you’re self-employed and have employees and you’re curious as to whether to go with the SEP IRA over the SIMPLE IRA or traditional 401k, I would still say, mostly, no. The Takeaway: Solo 401(k) vs. SEP IRA. Solo 401(k) plans also allow you to make post-tax Roth contributions. The benefit of a tax deferred retirement account is that they grow on a tax deferred basis as well. SEP IRA vs 401k: How SEP IRAs Compare. But the biggest question is, which one is right for you? It is only when you hire full-time employees that a SEP IRA makes sense. I think I know what the answer is but I just wanted to ask the BP community to … Roger Wohlner December 29, 2020. Working for yourself doesn’t mean you have to miss out on the tax benefits that regular employees get from standard workplace retirement plans, though. Employers can offer a 401(k), a SEP IRA, or SIMPLE IRA, while individuals can set up a traditional or Roth IRA. “The primary question many taxpayers ask when deciding between a SEP and a Solo 401(k) is ‘What is the maximum I can contribute?’ In most cases, the Solo 401K allows for a greater contribution and tax deduction, especially in cases where the individual’s self-employment income is limited,” says Dave Cherill, a certified public accountant (CPA) and member of the American Institute of CPAs’ Personal Financial Planning Executive Committee. If you’re deciding between a solo 401(k) and a SEP IRA, and you have employees, the choice is easy: SEP IRA. SEP-IRA and Solo 401K target solo entrepreneurs; an entrepreneur and spouse, and business owners with no employees or contract-only employees. If you qualify, you may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs. It’s easier to max out your Solo 401k contributions vs the SEP IRA. Retirement. Simply stated there are 2 primary advantages of the Individual 401k over the SEP IRA. Contributions can be made for up to 25% of your compensation … With a SEP IRA you can set aside up to 25 percent of your business’s income, up to $57,000 annually (as of 2020). In the 3 tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either. I now realize it's only 20% and will have to take out some money. This is the total amount the employee can personally contribute to all SEP, Roth, and traditional IRAs each year. A SEP IRA differs from a 401(k) plan in the following ways: Suitability: A SEP IRA is available to small business owners and self-employed individuals, including sole proprietors, partnership firms, and corporations. The answer is complicated and is highly dependent on your personal financial goals. To understand what’s different with the QBI deduction in play and whether it’s important to you, let’s review the traditional considerations when choosing between a SEP IRA and Solo 401(k). This is especially so for self-employed people earning less than $275,000. The SEP-IRA limit is up to 25% of an employee’s salary or up to $57,000, depending on which is less. Planning for retirement is a task that is not worth procrastinating. Employers do not have an annual filing requirement with a SEP-IRA as they do with other retirement plans.#3. Nearly all brokerage firms offer SEP IRAs, and in most cases they can be opened online. And is one better than another? There are lower startup costs and operational costs for aa SEP-IRA compared to other retirement plans that would be considered “traditional.”#2. 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