Small Business Retirement: Comparing the Solo 401k v. SEP IRA

August 16, 2011 at 1:45 am | Posted in Uncategorized | Leave a comment

Hmm..

The Solo 401k and SEP IRA are the two most common small business owner retirement plans.

Who are eligible for these plans?

To qualify for the Solo 401k, you must be the sole owner of the business, although a spouse can also be included in the plan. You must also not be expecting to employ any other staff in your business in the future.

Those eligible for SEP IRA are sole proprietors, partnerships, incorporated and unincorporated small businesses including Sub S corporations, and individuals with self employment income even if they are covered by their employers retirement plan such as a 401k, 403b or 457 plan.

If you are a sole proprietor, which one should you choose? Here’s a basic comparison between them:

Solo 401k

  • Has potentially greater retirement contributions at identical income levels
  • Allowed to take out a loan against a Solo 401K to up to 50% of the 401K’s value ($50,000 maximum)
  • Greater administrative responsibilities and fees

SEP IRA

  • Less contribution and tax deduction
  • Not allowed to take a loan against it
  • Easy to set up and low administrative responsibilities

So which one should you pick?

If you think you will need to use the loan feature or you want to maximize your annual retirement contributions, you should consider a Solo 401k. If you want to stick with something simple, you should go with the SEP IRA.

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