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Solo 401k vs. SEP IRA – Which is Better?

Solo 401k vs. SEP IRA – Which is Better?

Solo 401k or SEP IRA, which is better? They are both popular retirement plans for small business owners and self-employed individuals. However, one is a 401k plan and the other is an individual retirement account. Additionally, both have very different features. So, which is best for small business owners and the self-employed? We’ll take a look at both retirement plans in this article.

Key Points
  • The Solo 401(k) and SEP IRA plans are two popular options for the self-employed
  • One can only utilize a Solo 401(k) if there are no full-time employees
  • The Solo 401(k) is arguably the best plan for the self-employed

If you are a small business owner or have any type of self-employment income, the choice of retirement plans usually comes down to a Solo 401k vs. a SEP IRA. These are the two most popular retirement plans for the self-employed.

A Solo 401(k), which you may also know as an Individual 401(k) or One-Participant 401(k), allows for higher annual contributions and is the better choice for those looking to lower their tax bill.

A Simplified Employee Pension (SEP) is a basic retirement plan that best fits small businesses. As the business owner, you make contributions for yourself and all eligible employees at an equal rate. An employee is eligible if he or she:

  • Is at least age 21
  • Has worked for the company for at least three of the previous five years
  • Has earned $600 in compensation each of those years.

For example, if you contribute 10% of your salary to a SEP, you must do the same for each eligible employee.

Solo 401k vs. a SEP IRA

Like all other retirement plan options, SEP IRAs have contribution limits, which is the lesser of:

  • 25% of the employee’s compensation
  • $61,000 for 2022

A Solo 401(k) plan offers the plan participant the ability to make contributions as both the employer and employee as follows:

As an employee, the lesser of:

  • 100% compensation (“earned income” in the case of a self-employed individual)
  • $20,500 if under age 50 or $27,000 if age 50+

As an employer:

  • 25% of compensation or 20% of earned income
  • The total amount cannot exceed $61,000 ($67,500 if age 50+) for 2022

On paper, they look pretty similar. However, a SEP IRA does not let you contribute as an employee. Additionally, there is no “catch-up” contribution when you reach age 50.

The question then becomes, “Are you eligible to contribute to a Solo 401(k)?”

A Solo 401(k) plan, or Individual 401(k), has certain eligibility requirements:

  • The presence of self employment activity
  • The absence of full-time employees

First, you must have self-employment income. This applies whether you’re a small business owner, you do contracting work, freelance, consult, etc. Secondly, you cannot have any full-time employees working for you. An exception to this rule is if your spouse works for the business. He or she is then considered an owner-employee, not simply an employee. Further, other owners are not considered employees, even if they are full-time.

Where should you start your Solo 401(k) Plan?

IRA Financial Group has helped establish and maintain Solo 401(k) plans for thousands of clients. Our one-time establishment fee of $999 gives you all of this:

  • Establishment of IRS approved Self-Directed Solo 401(k) Plan
  • Free Solo 401(k) Plan tax consultation with in-house tax professionals
  • IRS Opinion Letter
  • Adoption Agreement
  • Basic Plan Document
  • EGTRRA Amendment
  • Summary Plan Description
  • Trust Agreement
  • Appointment of Trustee
  • Beneficiary Designation
  • Loan Procedure
  • Loan Promissory Note
  • Application for plan trust EIN
  • Assistance with tax-free rollover of funds to Solo 401(k) Plan
  • Assistance with opening plan bank account
  • A Free Solo 401(k) Plan tax support
  • Free tax consultation on the UBTI and UDFI rules
  • A Free tax consultation of “Disqualified Person” and “Prohibited Transaction” Rules
  • Free tax consultation on IRS Form 5500-EZ & assistance with completing form
  • Guaranteed IRS audit support

You can learn about all the benefits of this individual retirement plan in tax attorney Adam Bergman’s Solo 401k video. He also has a very information video about the Solo 401k vs. SEP IRA, which you can find on the IRA Financial YouTube channel.

Contact Us

If you are self-employed and want to save as much as you can for retirement, while at the same time lessening your tax bill, contact IRA Financial Group. A Solo 401(k) is the perfect solution for you! Contact us today or call at 800.472.0646 to speak with a Solo 401(k) specialist. Now you know why you should consider a Solo 401(k) vs. a SEP IRA!


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