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The One Time a SEP-IRA Beats a Solo 401(k)
Self-employed individuals have a leg up on W-2 employees in saving for retirement and cutting their tax bills thanks to more generous tax-deductible retirement plan contribution limits on SEP-IRAs, Solo 401(k)s (also called “Individual 401(k)s”) and defined benefit plans.
Did you have self-employment income in 2018? Do you want to shelter some of that income from taxes and invest in your retirement, but you missed the December 31, 2018 Solo 401(k) deadline? You still have a decent option available:
Because the SEP-IRA has a later establishment deadline (your tax filing deadline) than a Solo 401(k) (December 31 of the tax year of the contribution), this is the only time a SEP-IRA beats out a Solo 401(k). In all other ways the Solo 401(k) is a superior plan, in our opinion.
First, what is a Solo 401(k) and why is it better than a SEP-IRA?
A Solo (or Individual) 401(k):
Because you can usually make a significantly larger contribution to a Solo 401(k) than to a SEP-IRA at a given income level, the Solo 401(k) is usually a superior choice for self-employed individuals with no employees. Higher contributions mean more tax savings and faster growth of your retirement account.
The relative advantage of a Solo 401(k) over a SEP-IRA is most stark for individuals at lower income levels. Let’s look at an example under both plans:
If you missed the December 31 Solo 401(k) deadline, what should you do?
Please contact us if you would like us to offer our views on how, for your particular circumstances, you can best cut your tax bill while saving for retirement.
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