SEP IRA vs SOLO 401k: Which Retirement Plan Gives You the Most
SEP IRA vs Solo 401k: which is the best plan for you?
Both are popular options, offering a way to save for retirement. Both also offer tax deductions. So how do you choose?
There are significant differences between the SEP IRA and SOLO 401k. Consider the following:
SEP IRA features
- Eligibility. All typical employees over the age of 21 are eligible and allowed to participate. The annual earning of the employee must be at least $550, and he/she must be an employee of the same company for at least the previous 3 to 5 years. This type of retirement plan is for employer contributions only. Applicants may check with their custodian if they are qualified or for further requirements.
- Employee Contribution Limits. There are technically no applied employee contribution limits. However, the employees could have an IRA contribution based on individual cases.
- Employer Contribution Limits. The updated limit for 2013 is $51,000 or 25% of compensation of the participant. This contribution is basically deductible, but is not required per year.
SOLO 401k Features
- Eligibility. This retirement plan has no income or age restrictions in general. In contrast to the SEP IRA, the Solo 401k features employee and employer contributions.
- Employee Contribution Limits. The updated limit for employee contribution is $17,500 for 2013. Participants who are 50 years old and over could have an additional amount of $5,500. However, there could be no exceeding of 100% of the total compensation.
- Employer Contribution Limits. The employer contribution limit is 20-25% of the total compensation, depending on the business structure, for a combined maximum of $51,000 for 2013 or for employees who are 50 years old and over, a total amount of $56,500 per year. The contributions are not annually required.
SEP IRA vs SOLO 401k Plan
There are other differences between the SEP IRA vs SOLO 401k plan as well, such as:
- The SEP IRA plan contribution calculation is based on the percentage of your compensation. Thus, it depends on your income for a particular year.
- The Solo 401k offers loans for the plan holder which can be used to pay bills and expenses. This is not available for SEP IRA retirement plans.