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Brad Tinnon

SEP IRA vs Solo 401k

If you can relate to any of the following scenarios then this blog post is for you:

  • You are a one (or multiple) owner company with no employees.
  • You are a husband and wife owned company with no employees.
  • You are a 1099 contractor with no employees.

Over the past few weeks I have been discussing whether or not small business owners should implement a company retirement plan such as a 401k.

Today, I want to discuss a unique plan that is specifically designed for small businesses that don’t have any employees – the Solo 401k.

Many business owners in this position are familiar with SEP IRAs, but not with the Solo 401k.

My goal today is to compare the SEP IRA vs Solo 401k so that you can make an informed decision as to which one is right for you.

If perhaps you’re on the fence about whether or not to establish a retirement plan at your business, then I encourage you to read the following blogs I’ve written:

Should You Invest Outside Your Business?

Should You Set Up A Small Business 401k?

4 Secret Benefits of Setting Up a 401k

But for now, let’s assume that you understand the benefits of having a retirement plan and you want to understand whether a SEP IRA or Solo 401k is right for you.

A SEP IRA allows you to:

  1. contribute up to 25% of your W-2 salary (or 20% of your net self employment income if you don’t have a W-2 salary).

A Solo 401k, on the other hand, allows you to:

  1. contribute up to $18,500 of your salary (plus an extra $6,000 if you are 50 or older).
  2. pay yourself a profit sharing contribution equal to 25% of your W-2 salary (or 20% of your net self employment income).
  3. take out a loan of up to $50,000.
  4. implement a Roth 401k feature, which provides you with tax free withdrawals in the future.

As you can see, the Solo 401k appears to be a superior alternative to the SEP IRA.  However, there is one area where the SEP IRA shines – it is generally easier to handle from an administrative standpoint.

But in reality the Solo 401k is not that difficult either.


In summary, there are many more features to a Solo 401k than a SEP IRA, but which one is best?

If you aren’t too concerned about being able to contribute the most you can, then a SEP IRA is likely best for you due to its simplicity.

However, if you do want to maximize contributions, have the ability to take a loan, or have tax free money in the future, then a Solo 401k is likely the way to go.

I don’t know if maximizing contributions is a goal of yours, but keep in mind that more you contribute, the more you minimize income taxes.

MAGIC # IS $220,000

Another interesting tidbit is that you will always be able to contribute more to a Solo 401k than a SEP IRA so long as your income is below $220,000 (in 2018).

Once your income equals or exceeds $220,000 then you will be able to contribute the same to both the SEP IRA and Solo 401k, unless your are age 50 or older.  If you are 50 or older then the Solo 401k allows for an extra $6,000 contribution (the SEP IRA does not allow this).

As you can see there are a number of factors to consider when evaluating the SEP IRA vs Solo 401k.

If you need any help navigating through this or want to learn more, then feel free to reach out to us or check out the Company Sponsored Retirement Plan section on our website.

Stay tuned as I will soon be discussing the high fees within 401k plans that are potentially eating away at the returns of employees.  If you are new to our blog then sign up for our eContent so that you don’t miss the next article.


Brad E.S. Tinnon

P.S. Please feel free to leave any comments you may have below.  Thanks for tuning in.

Photo courtesy of marta … maduixaaaa


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