CHOOSE THE RIGHT ONE → SOLO 401(k) vs SEP IRA
Both the Solo 401(k) and SEP IRA are great plans. In this video, I help you choose the right one. As an entrepreneur, self-employed, and/or small business owner, you’ve got to pivot from time to time when it comes to retirement planning and investing! There are some things you need to know about these retirement plans as you build your wealth.
Money expert advice can help you decide on a solo 401(k) also known as a self-employed 401(k), and SEP IRA, as explained in this video.
Do you have a corporate job and a side business? Chances are you’re missing a big opportunity to build your wealth. A MONEY TIP in this video will help you win that opportunity!
Watch this video until the end to learn how to get your retirement planning aligned to your financial well-being. I’ve also included money expert tips in this video for self-employed so you know your retirement options.
And if you want to learn more about traditional IRA, roth IRA, and other retirement options, then check out the videos about these retirement savings accounts on my channel made just for you!
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Retirement plans are essential for every individual who wants to have a secure future. The most popular plans are the Solo 401k and the SEP IRA, but choosing the right one can be a confusing task. Each of these plans comes with its own set of benefits and limitations. So, let’s explore the differences between them and help you pick the right one.
Understanding Solo 401k and SEP IRA
Solo 401k is a retirement savings plan available to self-employed individuals with no employees, except their spouse. It has the same contribution limits as a traditional 401k plan. In 2021, you can contribute up to $19,500 as an employee, and if you’re over 50 years old, you can add an additional $6,500 in catch-up contributions. As an employer, you can contribute up to 25% of your self-employment income or $58,000, whichever is less.
SEP IRA is another retirement plan designed for self-employed individuals with employees or those who are looking to make contributions for their employees. It allows an annual contribution of up to 25% of the employee’s compensation or $58,000, whichever is less. The employer makes all the contributions, and the employees don’t contribute to the plan.
Differences between Solo 401k and SEP IRA
The most significant difference between the two is how much you can contribute. In Solo 401k, you can contribute up to $19,500 as an employee and also as an employer, you can add a maximum of $58,000 per year. This means that you can contribute more to Solo 401k than to SEP IRA.
In SEP IRA, although an employer can contribute up to 25% of the employee’s compensation or $58,000, whichever is less, the employee isn’t allowed to contribute anything. It’s a retirement plan meant for the employer only.
Another difference is in the contribution limits for employees over the age of 50. Solo 401k allows an additional catch-up contribution of $6,500, while SEP IRA doesn’t have that option.
The Bottom Line
In conclusion, choosing the right retirement plan depends on your individual circumstances. If you’re self-employed, have no employees or plan to hire a spouse as an employee, and want to contribute more to your retirement, then Solo 401k may be the best choice for you. However, if you have employees and want to make contributions for them without requiring them to contribute, then SEP IRA is your best option.
It’s also essential to note that you shouldn’t choose one plan over the other solely based on the contribution limits. Other factors such as investment flexibility, fees, and eligibility requirements should also be considered. Therefore, it’s advisable to consult with a financial advisor to help you in choosing the right retirement plan.
Which type of retirement plan are you contributing to in 2021?
If you already filed 2020 tax return and did not report contribution to SEP plan, you can't contribute to SEP at this point, correct? Your contribution starts in 2021? Thank you so much!
Thank you so much for explaining these options. I subscribed : ) Just to make sure, you can contribute to SEP IRA if you are self-employed and have no employees? I ask because I have Fidelity, and on its website, it says "self-employed individuals or small-business owners, primarily those with only a few employees" are eligible. It does not specifically states that those without employees are eligible, so I wanted to make sure. Thank you!
This makes a lot of sense!
Wow, you make it easy to understand! Thanks for sharing this
Thanks for amazingly simple explanation Stephanie, loved the examples too. I could not stop thinking that someone saving 50% of their income could retire in around 17 years!!
This is an awesome video and helps clearly explain both of these financing options. Great video thanks for sharing.