TAX BULLETIN – Tax Tips, News, & Updates: Issue No. 1 | Vol No. 6
Each month we will highlight tax and business-related information, which we believe can be important to your tax and or personal financial planning. This month we will focus on an important topic, which my clients have repeatedly asked me about; how to save for their retirement. If you are self-employed, this month’s topic is for you!
SEP IRA vs. One-Participant 401(k)
As a self-employed person, you get to control your own schedule and your own strategy; your retirement savings can be consistent with that philosophy.
- A SEP IRA works like a traditional IRA, customized for freelancers and other self-employed people.
- A solo 401(k) is like a traditional 401(k), but it’s only for a business owner with no employees, or a business owner and spouse.
- Both allow savers to sock away the same amount of money, but the specifics differ slightly.
You choose—a SEP IRA or a One-Participant 401(k) to plan for your retirement savings.
Unlike a company 401(k), which might limit your investment choices to a few mutual funds or one fund family, these plans give you ultimate discretion over your investments and allocation. Generally speaking, that means you get access to a much wider selection of investment choices—stocks, bonds, exchange-traded funds (ETFs), and even some alternative investments are allowed. The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:
- Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
— $23,000 in 2023) if age 50 or over $7,500 catch-up plus - Employer nonelective contributions up to:
— 25% of compensation as defined by the plan
| Overview as of 2024 | SEP IRA | Solo 401(k) Better of the two[1] |
| Allows catch-up contributions | No | Yes |
| Maximum contribution | $69,000 | $69,000 (plus $7,500 catch-up) |
| Contribution rates | Up to 25% of income | Employee contribution up to $23,000 (plus catch-up), plus employer portion up to 25% of earned income (after self-employment tax and your withdrawals) |
| Include other (non-spouse) employees | Yes | No |
| Roth version available | No | Yes |
| Loans Allowed | No | Yes |
[1] We hope you enjoyed reading and learned much. Next month: FINCEN Regulations
[1] References are intext
3) We recommend that a Solo 401K is the better of the two choices
No Comments