IRA Financial’s Adam Bergman Esq. discusses why the Solo 401(k) plan is still the best retirement plan for the self-employed or small business owner in 2023.
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About IRA Financial:

IRA Financial was founded by Adam Bergman, a former tax and ERISA attorney who worked at some of the largest law firms. During his years of practice, he noticed that many of his clients were not even aware that they can use an IRA or 401(k) plan to make alternative asset investments, such as real estate. He created IRA Financial to help educate retirement account holders about the benefits of self-directed retirement plan solutions.

IRA Financial is a retirement account facilitator, document filing, and do-it yourself document service, not a law firm. IRA Financial does not provide legal services. No attorney-client relationship exists between Client and IRA Financial Group, its management, salespersons or IRA Financial’s in-house legal counsel. IRA Financial provides IRA retirement facilitation service and CANNOT provide Client with legal, investment, or financial advice. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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AdBits – The SEP IRA vs the Solo 401(k) in 2023

When it comes to retirement savings options for self-employed individuals and small business owners, the SEP IRA and the Solo 401(k) are two popular choices. Both offer tax-advantaged retirement saving opportunities, but they have key differences that can impact which one is the best option for you.

The SEP IRA, or Simplified Employee Pension Individual retirement account, is a retirement plan specifically designed for self-employed individuals and small business owners. It allows contributions to be made by the employer (or the self-employed individual) on behalf of themselves and their employees. Contributions are tax-deductible and investment earnings grow tax-deferred until withdrawn in retirement.

On the other hand, the Solo 401(k), also known as an Individual 401(k) or a Self-Employed 401(k), is a retirement account designed for self-employed individuals and small business owners with no full-time employees other than themselves or a spouse. It allows for higher contribution limits than a SEP IRA and also offers the option for a Roth component, allowing for after-tax contributions and tax-free withdrawals in retirement.

So, which plan is better for your retirement savings needs?

One of the main factors to consider is the contribution limits. For 2023, the contribution limit for a SEP IRA is 25% of compensation, up to a maximum of $61,000. This can be a significant advantage for those who want to maximize their retirement savings. However, with a Solo 401(k), the contribution limits are even higher. In 2023, the maximum contribution is $61,000 plus an additional $6,500 catch-up contribution for individuals over the age of 50. This can be especially beneficial for those who are looking to make larger contributions to their retirement savings.

Another important consideration is the administrative responsibilities and potential costs associated with each plan. A SEP IRA is relatively easy to set up and maintain, with minimal administrative requirements. On the other hand, a Solo 401(k) can have more administrative responsibilities, especially if you hire employees in the future. However, the potential for higher contribution limits and the flexibility of the plan may outweigh the additional administrative burden for some individuals.

It’s also worth considering the investment options available with each plan. With a SEP IRA, your investment options are limited to the offerings of the financial institution where the account is held. However, a Solo 401(k) allows for a wider range of investment choices, including stocks, bonds, mutual funds, and other investment vehicles, giving you greater control over your retirement savings.

In conclusion, both the SEP IRA and the Solo 401(k) are valuable tools for self-employed individuals and small business owners to save for retirement. When deciding between the two, it’s important to consider your specific financial situation, including your income, desired contribution amount, administrative requirements, and investment preferences. Consulting with a financial advisor can also be helpful in determining the best retirement savings option for your individual needs.