Do you know which retirement account will work best for you? Join Adam Bergman as he offers his thoughts on a Solo 401(k) vs. a SEP IRA.

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About IRA Financial:

IRA Financial Group 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.

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As a self-employed individual, you have a few options when it comes to choosing a retirement plan for yourself. Two of the most popular options are Solo 401(k) plans and SEP IRAs. While both can be good choices, there are some key differences between the two that could make one a better choice for your specific situation. Here are the top three reasons why a solo 401(k) might be a better choice than a SEP IRA:

1. Higher Contribution Limits

A solo 401(k) plan allows you to contribute more money to your retirement savings each year than a SEP IRA. For 2021, the maximum employee contribution limit for solo 401(k) plans is $19,500 (or $26,000 if you are 50 or older). In addition, solo 401(k) plan owners can make employer contributions of up to 25% of their net self-employment earnings (which is calculated after deducting the employer contribution and half of the self-employment tax). This means that you could potentially contribute up to a total of $58,000 to your retirement savings in 2021 (or $64,500 if you are 50 or older). In contrast, SEP IRA contributions are limited to 25% of net self-employment earnings, up to a maximum of $58,000 for 2021.

2. Roth Contributions

Another advantage of a solo 401(k) plan is that it allows for Roth contributions. Roth contributions are made after-tax, which means that you won’t get an immediate tax deduction for them. However, the money in a Roth account grows tax-free and can be withdrawn tax-free in retirement. Roth contributions can be particularly advantageous if you expect your tax bracket in retirement to be higher than it is now, since you’ll be paying taxes on the contributions at your current, lower tax rate.

3. Loan Option

Finally, a solo 401(k) plan allows for loans to be taken out from the account. While it’s generally not recommended to take a loan from your retirement savings, it’s nice to have the option in case of an emergency. With a solo 401(k), you can borrow up to 50% of your vested account balance (up to a maximum of $50,000) and pay it back with interest over a period of five years.

While both solo 401(k) plans and SEP IRAs have their advantages and drawbacks, it’s clear that a solo 401(k) plan offers some distinct benefits that a SEP IRA does not. If you’re a self-employed individual looking to maximize your retirement savings, you should consider the benefits of a solo 401(k) plan and see if it’s the right option for you.