Many mistakenly believe that because they are small business owners they are too small for the Solo 401k Plan and opt out for the SEP IRA without comparing the options. But the truth is, Owner-Only 401k (also known as Solo 401k or Individual 401k) are inexpensive to set up and very simple to maintain. Before making your selection, be sure to carefully compare SEP vs Solo 401k, the result of making the right choice can save you thousands of dollars in administrative cost as well as tax savings!
SEP vs Solo 401k: Comparing the options
Typically, if any business operates without full time employees and utilizes SIMPLE IRA or SEP IRA, they are probably using the wrong plan and at the very least should review the option of Solo 401k, which is a qualified retirement plan designed for small business owners without full time employees (by IRS definition “full-time” means workers employed over 1,000 hours per year). In addition, the Roth sub-account option is available with the Solo 401(k) Plan, whereas that is not the case with SEP or SIMPLE IRA.
The power is in the deferrals. For the year 2013, the maximum Solo 401k Contribution limit is $51,000, which is also the same with the SEP IRA. However, with the Solo 401k Plan the maximum contribution can be achieved with earnings as low as $134,000. With the SEP IRA, on the other hand, the owner has to earn at least $204,000. And the Solo 401k also has $5,500 “catch-up” contributions available for those over 50 year of age. The “catch-up” provision is non-existent in a SEP IRA.
When comparing SEP vs Solo 401k, another major advantage of the Owner-Only 401k plan is the Roth provision available with this plan, that SEP IRA doesn’t have, allowing account holder make after tax (Roth) contributions.
Also, Solo 401k Plan is set up under different set of IRS rules and the custodian is not required to administer the account, this allows the client to be the trustee of his own plan. If Sense Financial is used as the provider of the plan documents, the client then has the ability to establish checking account for the Solo 401k Trust at any financial institution. This eliminates the cost and delays associated with the custodian and gives client Checkbook Control over the plan and its assets.
These are just a few of many benefits of the Solo 401k Plan. Please contact one of our retirement account experts for a free consultation.
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