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Solo 401(k) vs. SEP IRA

December 1, 2021



A Solo 401(k) and SEP IRA are two retirement savings options that are well-suited for small business owners or self-employed individuals. Both offer significant tax benefits and can help you save for your retirement.

A Solo 401(k) is a type of individual 401(k) plan that is designed for self-employed individuals or small business owners who do not have any full-time employees other than a spouse. This type of plan allows you to contribute to the plan both as an employer and as an employee. As an employer, you can contribute up to 25% of your net self-employment income, up to a maximum of $58,000 per year (for 2021). As an employee, you can also contribute up to $19,500 per year (for 2021), or $26,000 if you are over the age of 50.

A SEP IRA, on the other hand, is a retirement savings plan that is designed for small business owners and self-employed individuals. With a SEP IRA, you can contribute up to 25% of your net self-employment income, up to a maximum of $58,000 per year (for 2021). Unlike a Solo 401(k), however, you cannot make contributions to a SEP IRA as an employee.

Both Solo 401(k)s and SEP IRAs offer significant tax benefits. Contributions to both types of plans are tax-deductible, which means that they can reduce your taxable income and lower your tax bill. Additionally, any earnings on your investments within the plan grow tax-free until you withdraw them in retirement.

One key difference between Solo 401(k)s and SEP IRAs is that Solo 401(k)s offer more flexibility when it comes to making withdrawals. With a Solo 401(k), you can take out loans against your account balance, whereas this is not possible with a SEP IRA. Additionally, Solo 401(k)s allow for in-service distributions, which means that you can take out funds from your account before you reach retirement age without incurring a penalty. SEP IRAs, on the other hand, do not allow for in-service distributions.

Overall, both Solo 401(k)s and SEP IRAs can be great options for small business owners and self-employed individuals who are looking to save for retirement. The choice between the two will ultimately depend on your specific circumstances and savings goals. It's important to carefully consider your options and consult with a financial advisor before making a decision.

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