Comparing SEP vs Solo 401k
When comparing SEP vs Solo 401k, the Solo 401k is the clear winner. The Solo 401k gives you two capacities to hit its contribution limit, while the SEP IRA only gives one.
when it comes to achieving the maximum contribution limit for tax deferral.
Comparing the contribution limits of SEP vs Solo 401k
On paper, the SEP IRA and the Solo 401k have comparable contribution limits. Both have a maximum contribution limit of $51,000 for 2013. So far, so good. But this is where the similarities end.
The Solo 401k (also known as Individual K) gives you a greater chance of reaching its maximum contribution limit because of the way it calculates contributions.
Calculating the contributions
The Solo 401k plan allows contributions to be made in two capacities- as both employer and employee. Participants have two ways to reach the contribution limit, while the SEP only gives one.
Solo 401k contributions can be made as the employer and owner of the business. This employer/profit-sharing contribution can equal up to 20-25% of the compensation, or the net self-employment income.
But the Solo 401k also gives you the ability to contribute as employee, in addition to the employer contribution. Employee, or salary deferral, contributions can be made to the plan. This employee/salary deferral can equal up to $17,500 if the participant is under the age of 50.
And, for those age 50 and above, an additional $5,500 catch-up provision can be made. This makes the maximum employee/salary deferral contribution limit $23,000, and the maximum total Solo 401k contribution limit to $56,500 for those age 50 and above. The SEP IRA does not have this catch-up contribution provision.
The SEP IRA also gives only one capacity to reach its maximum contribution limit. Contributions to the plan are calculated only as a percentage of the net self-employment income. In order to reach the maximum contribution limit with a SEP, the net income then must be at least $255,000 for 2013. You only have one way to reach the maximum SEP contribution limit, and that is through a high net income.
So while both plans have comparable contribution limits, the Solo 401k gives you two capacities to meet that limit, while the SEP only gives one. The Solo 401k is the clear winner when choosing between the two.
Related Terms:
- sep ira
- comparing sep vs solo 401k
- roth solo 401k
- solo 401k roth
