Are you an entreprenuer, 1099 employee or a self-employed sole proprietor. You may be missing out on the BEST retirement plan for you. What is the Solo(k) and why are we always talking about it….(read more)

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Solo(k) vs. SEP IRA: Which is Better?

When it comes to retirement savings, there are a variety of options available for self-employed individuals. Two popular choices are the Solo 401(k) and the SEP IRA. Both of these retirement plans offer several advantages, but they have some key differences that may make one option more suitable for you depending on your specific circumstances.

Let’s take a closer look at each plan to determine which might be better for you.

Solo 401(k)
A Solo 401(k), also known as an Individual 401(k) or a Uni-k, is a retirement plan designed for self-employed individuals and small business owners with no employees (other than a spouse). One of the main advantages of a Solo 401(k) is the ability to make both employee and employer contributions. As an employee, you can make elective deferrals of up to $19,500 in 2020 (or $26,000 if you’re age 50 or older). As the employer, you can make additional contributions up to 25% of your net self-employment income (up to a maximum of $57,000 in 2020).

Another benefit of a Solo 401(k) is the option to take out a loan from the plan. This can provide a source of emergency funds or be used to finance a business or real estate investment opportunity.

SEP IRA
A Simplified Employee Pension Individual retirement account (SEP IRA) is a retirement plan that allows self-employed individuals and small business owners to make tax-deductible contributions on behalf of themselves and their employees. Contributions to a SEP IRA are made solely by the employer and are typically limited to 25% of the employee’s compensation (up to a maximum of $57,000 in 2020).

One of the key advantages of a SEP IRA is its simplicity and flexibility. Contributions are not required every year, and the employer has the option to adjust the amount of the contributions from year to year based on the business’s financial performance.

So, which is better?

Both the Solo 401(k) and the SEP IRA have their own set of advantages, and the one that is better for you depends on your specific needs and circumstances.

If you are self-employed with no employees other than a spouse, the Solo 401(k) may be a better option for you due to its higher contribution limits and the ability to make both employee and employer contributions.

On the other hand, if you have employees or if you are looking for a retirement plan that offers more flexibility in terms of contributions, the SEP IRA may be a better choice for you.

Ultimately, it’s important to carefully consider your retirement savings goals, financial situation, and business needs before making a decision. It’s also a good idea to consult with a financial advisor who can help you weigh the pros and cons of each plan and determine which one is the best fit for you.