Which Is Better for Business Owners?

Small enterprise house owners have a number of choices to select from on the subject of retirement planning. SEP IRAs have been launched as a method to let small enterprise house owners set up retirement accounts for his or her companies. Monetary laws created the Solo 401(ok), which additionally gives a simplified method for enterprise house owners to avoid wasting for retirement and revel in among the advantages of an employer-sponsored 401(ok) plan.

A self-employed enterprise can open a SEP IRA and a Solo 401(ok) plan and contribute to each plans. Each are tax-deferred retirement methods. The SEP-IRA permits people to avoid wasting as much as 25% of their revenue into the account. With a solo 401(ok), people can save as much as 100% as an worker contribution, as much as the annual greenback threshold, and likewise achieve employer contributions of as much as 25%.

Key Takeaways

  • SEP IRAs and solo 401(ok)s each permit small enterprise house owners to determine retirement accounts for his or her staff.
  • SEP IRAs are funded by employer contributions alone.
  • Solo 401(ok)s permit each employer and worker contributions.

SEP IRA vs. Solo 401(ok)


SEP IRAs have been round for many years, and they’re in all probability nonetheless the only method for enterprise house owners to avoid wasting for retirement. These plans are purely profit-sharing in nature and permit house owners to contribute for themselves and all eligible staff.

The quantity that may be contributed is the lesser of as much as 25% of enterprise income—20% within the case of a sole proprietorship or a single-member restricted legal responsibility company—or a set greenback quantity adjusted for inflation yearly ($61,000 for 2022 and $66,000 for 2023.)

One of many principal benefits of SEPs is their relative simplicity in contrast with the rigorous reporting necessities that include certified plans, even these which might be designed for self-employed individuals, akin to Keogh plans.

SEP IRAs do permit employers to make retirement plan contributions on behalf of staff, although they’re allowed to exclude part-time employees, these beneath age 21, and those that haven’t labored for the employer in at the least three of the earlier 5 years.

Contribution limits are the identical as for the proprietor, besides that it’s the lesser of the greenback restrict or 25% of the worker’s complete compensation. SEP IRAs may also be established at any time earlier than the enterprise proprietor recordsdata a tax return.

Solo 401(ok)

Solo 401(ok) plans are a comparatively current addition to the retirement plan neighborhood. These plans are designed completely for sole proprietorships which have just one worker (the proprietor). Often known as an “particular person” or “self-employed” 401(ok) plan, one of these retirement financial savings account is usually thought of a greater choice for solo practitioners than a SEP IRA as a result of it additionally gives the next options:

  • Worker deferrals: In contrast to SEP plans, solo 401(ok)s permit members to make a separate worker contribution in addition to a profit-sharing contribution. This permits the proprietor to contribute as much as $20,500 to the plan for 2022 and $22,500 for 2023, even when the enterprise loses cash in these years.
  • Catch-up contributions: A solo 401(ok) permits the identical quantity to be contributed by the proprietor as a SEP (see limits above), nevertheless it additionally permits members who’re age 50 and above to contribute a further $6,500 for 2022 and $7,500 for 2023 as catch-up contributions.
  • Roth contributions: Solo 401(ok) plans permit for post-tax Roth contributions, which may permit the proprietor to build up a considerable pool of tax-free cash over time. SEP IRAs solely permit conventional pretax contributions.
  • Mortgage provision: Solo 401(ok) plans can permit members to take out a mortgage equal to the lesser of fifty% of the plan stability or $50,000. Loans are usually not obtainable with SEP plans.

Solo 401(ok) contributions have to be made by Dec. 31 of the earlier yr to be counted on the tax return.

Solo 401(ok) vs. SEP IRA: Key Variations
Account Sort Employer Contribution Worker Contribution Catch-Up Contributions Roth Contributions Mortgage Provision Institution Requirement Operational Necessities
SEP IRA Sure No No No No Anytime earlier than submitting tax return Comparatively easy
Solo 401(ok) Sure Sure Sure Sure Sure Dec. 31 of the tax yr Rigorous reporting necessities

Which Ought to I Select?

Homeowners of small companies have extra decisions as we speak on the subject of saving for retirement. Those that have full-time staff can save for retirement utilizing a SEP IRA, whereas solo practitioners can select between that and a solo 401(ok) plan that has larger contribution limits and different benefits.

For extra info on retirement plans and accounts, obtain Publications 575, 590-A, and 590-B from the IRS web site, or seek the advice of your monetary advisor.

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