Whether you choose a solo 401(k), SEP IRA or another savings plan, its important to take the first step toward growing wealth. The only difference is that there's no elective employee contribution portion with a SEP IRA, just the profit-sharing portion. editorial policy, so you can trust that our content is honest and accurate. SEP stands for simplified employee pension, and it allows an employer (including the self-employed) to make contributions to employees retirement plans, giving them a way to save for retirement through their employer. Solo 401(k) accounts tend to offer a bit more flexibility in investment choices, too, Henry says. The solo 401(k) and SEP IRA are plans that can help fill this gap, helping small businesses provide for their workers. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence. Social Security's Trust Funds Could Run Out Sooner Than Expected. You can set up either type of account if you operate as a sole proprietorship and have no employees. Make contributions that are generally tax deductible by the business. If you have employees, you can make retirement plan contributions to a SEP IRA on their behalf. The SEP IRA and the Solo 401(k) have become a popular savings tool for self-employed persons who don't have an employer 401(k) plan, as they allow them to contribute more than the annual $6,000 contribution that is allowed in a Traditional IRA or Roth IRA. While SEP IRAs usually have a broader range of choices than 401(k) accounts, the choices are more limited than those available in a standard brokerage account. 3 The limit on employee elective deferrals to a 401(k) plan is subject to cost-of-living adjustments annually. You should consult a tax professional to determine what types of tax deductions you are eligible to claim. This remains the same as the 2020 contribution limit. The self-employed need to save for retirement, too, and heres one way. Claiming the Solo 401k Contribution . Thats because as employee they can contribute up to $20,500 in 2022 ($22,500 in 2023), but as employer they can add onto that up to 25% of their adjusted income for a maximum total contribution of $61,000 in 2022 ($66,000 in 2023). 2023 Social Finance, Inc. All rights reserved. The IRS sets the maximum that you and your employer can contribute to your 401 (k) each year. For Simplified Employee Pension (SEP) plans, employers can contribute the lesser of 25% of an employee's compensation or $66,000 for 2023. . A business owner can have both SEP IRA and Solo 401(k), but the total annual contributions should not exceed the annual limits provided by the IRS. The answer can depend largely on whether your business has employees or operates as a sole proprietorship and which plan yields more benefits, in terms of contribution limits and tax breaks. If you have an individual 401 (k) plan (and no other retirement plans to which you're contributing), your contribution limit will be $39,500 calculated as follows: Employee contribution of $19,500, plus Employer contribution of $20,000 (20% of $100,000). SEP IRA vs. Solo 401(k) Traditional Considerations. You'll have to pay yourself back with interest within five years, but a 401(k) loan can be a better option than a more traditional loan from a bank. Weighing the features of a solo 401(k) vs. SEP IRA can make it easier to decide which one is more suited to your retirement savings needs. According to the Bureau of Labor Statistics, more than 16.5 million Americans reported themselves as self-employed in September 2022. 2. Were transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Heres what you need to know about the solo 401(k) and SEP IRA, and when to use each plan. That means a self-employed person under 50 with an annual net profit of $100,000 could contribute a total of $18,587to an SEP IRA. SEP-IRAs can . * SoFi Lending $10 Check Your Rate on a Personal Loan or Student Loan Refinance Promotion (Promotion): The Promotion is offered by SoFi Lending Corp. or an affiliate (dba SoFi). The Fidelity Advisor SEP IRA has a minimal annual account maintenance fee of $15. Employee deferrals are 100% elective. Heres the full rundown on the solo 401(k) and why its a great fit for freelancers. If youre interested in a SEP, you can set up an IRA for yourself or for yourself and your employees through an online brokerage. SOIN1021438, Stay up to date on the latest business news and stock So if youre a freelancer or a gig worker, you might consider using a SEP IRA to plan for retirement. However, remember that your annual maximum contribution limit applies to your total contributions across all your 401(k) accounts. Can a Business Owner Have Both SEP IRA and Solo 401(k)? Charles Schwab and Fidelity Investments are two excellent providers of a solo 401(k), and they dont charge a fee to set it up, nor do they charge an ongoing maintenance fee. And youll be able to add more to the plan. With a self-employed 401(k), you can save up to $22,500 (in 2023) in your plan as an employee deferral, just as you would in a regular 401(k). One of the instances . Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. Total contributions -- combined employee elective contributions and profit-sharing contributions -- are limited to $61,000 in 2022 and $66,000 in 2023. If a rough patch hits, for example, with COVID-19, you can suspend contributions until things improve. Read more at Solo 401(k) Contribution Limits. Bankrate follows a strict Both are tax-deferred retirement strategies. If youre ready to start saving for the future, one way to get started is by opening a brokerage account on the SoFi Invest investment platform. SEP IRA contribution limits are, for the most part, the same for both employers and employees. Sometimes, that content may include information about products, features, or services that SoFi does not provide. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services. And both are easy to set up, easy to manage and easy to get support when neededall for a low monthly fee. This amount is the total contribution allowed by the IRS that employees can . If a rough patch hits, for example, with COVID-19, you can suspend contributions until things improve. Choosing a Roth solo 401(k) might appeal to you if youd like to be able to make tax-free withdrawals in retirement. Thats a big deal for any business owner. And switching from a solo 401(k) to an SEP IRA at some future date can be a big hassle, Henry warns. Simply, a Solo 401(k) allows you to save money for retirement from your self-employment or business income on a tax-advantaged basis. Theres no Roth option with a SEP IRA, which you may have with a solo 401(k). To get the best possible experience please use the latest version of Chrome, Firefox, Safari, or Microsoft Edge to view this website. The solo 401(k) and SEP IRA are two of the best retirement plans available for a small business owner even a self-employed freelancer looking to set up a professional caliber plan. SEP IRAs (Simplified Employee Pension Individual Retirement Arrangement) . On the application for a custodial IRA, the brokerage will typically ask for specific information, including: Contact information (e.g., your phone number, email address, and mailing address) Personal information about yourself, including your name, date of birth, and Social Security number. It can provide the benefits of a typical 401(k) plan: tax breaks, tax-deferred growth, tax-free growth if you opt for a solo Roth 401(k) and you can actually score some bonus perks, too, allowing you to stash even more cash in your plan. Making the world smarter, happier, and richer. Workers over 50 can contribute up to $19,000. SEP IRAs work much like traditional IRAs, with regard to the tax treatment of withdrawals. Learn more. Comprehensive management of employer-sponsored retirement accounts, including 401k and 403b. When it comes to retirement savings, people often get stumped deciding between an IRA and a 401k. Conclusion The solo 401(k) will typically allow them to contribute more to their retirement savings and offers greater flexibility for optimizing taxes both in the present and in retirement. For 2023, up to $15,500, not to exceed 100% of compensation. Here's What That Means for You, This Is My Favorite Retirement Account -- and It's Technically Not Even a Retirement Account, 3 Ways to Save on Taxes While Collecting Social Security, February's Inflation Numbers Could Spell Bad News for Your Upcoming Social Security COLA, 3 ETFs That Can Supercharge Your Retirement Savings, Made a Retirement Account Withdrawal? But even in some cases where hiring employees simply isnt in the cards, Henry sometimes advises the self-employed to choose a SEP IRA. This can limit your solo 401 (k) contributions if you have a full-time job with a 401 (k) and also do some freelance work on the side. His work has been cited by CNBC, the Washington Post, The New York Times and more. you can make contributions for a given year until April 15 of the following year), Flexible allocation method for profit sharing. That doesn't include an additional $6,500 allowed for catch-up contributions if you're 50 or older. Every situation is different, and an individual should assess the option that is best for their financial goals, but there is some truth to the fact that a SEP is easier to open, says Cherill. Investment decisions should be based on an individuals specific financial needs, goals, and risk profile. Visit Roth Solo 401k to learn more. The due date for making employee deferrals is based on the type of business that adopted the Solo 401 (k) plan. 2022 contribution limits for selected tax-deferred accounts Disclosures A SEP IRA or Simplified Employee Pension Plan is another option to consider if youre looking for retirement plans for those self-employed. Employees over age 50 can contribute an additional $3,500. Think of the solo 401(k) as a 401(k) just for yourself or you and a spouse, if youre the only two employed in your business. Each option has distinct features and amounts that can be contributed to the plan each . California Consumer Financial Privacy Notice. SEP IRA contribution limits. Employers with 100 or fewer employees. They may be able to make traditional IRA contributions to the SEP-IRA of up to $6,500 ($7,500 for employees age 50 or older) for the 2023 tax year. I would say that the biggest benefit of all is the Roth option, says Desmond Henry, a certified financial planner (CFP) based in Topeka, Kan. For someone who is a high earner, the solo makes sense because of the Roth option.. But thats not the only reason to pick a solo 401(k). If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, years of professional experience, income, and a variety of other factors. Solo 401k contribution calculation for an S or C corporation or an LLC taxed as a corporation. You will get a contribution comparison between a Solo 401(k), SIMPLE, and SEP IRA. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A. Weve maintained this reputation for over four decades by demystifying the financial decision-making If you use a solo 401(k) to save for retirement, youll also need to follow some reporting requirements. 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