SEP-IRA vs. Solo 401(k) – Know the retirement plans

by Joe on August 26, 2013

Today, RothMania’s first guest post. Thanks, Rick, for sharing with my readers –

Many small business owners are trying to find additional tax deduction plans. The most feasible deduction is funding of a comfortable retirement plan which helps you to save a lot of money. Now, the two most accepted plans are SEP-IRA and Solo 401(k). But many people are confused which plan to choose because everybody wishes to opt for the most suited one. Both the plans are chosen by self employed individuals because of high contribution limits and the flexibility.


A close look at the Solo 401(k)

Yes, it sounds like a retirement plan that allows you to defer tax payments. For this, the business run by an individual should not have any other employees apart from the spouse. Contributing to a Solo 401(k) helps you to reduce your taxable income and you can also enjoy the privilege of withdrawing from Solo 401(k) without any penalty, after your retirement. You need to pay income taxes on the money that is withdrawn.

This plan has a few unique qualities of its own because you are the employer as well as the employee in your venture. You should establish this plan before the year-end so that you can make contributions for the coming year.

In addition, there is a special feature too. You can take an amount from the employee’s contribution and assign it as a 401(k) contribution.

Know the SEP IRA plan

This is known as the ‘Simplified Employee Pension Retirement Arrangement’. This plan can be chosen by a businessman with or without any employees. If you contribute to this plan, you can enjoy deductions until retirement and you have to pay regular income taxes on the amount withdrawn. The providers will give you an array of options to choose from a long list of investment options.

You should always establish a SEP IRA before meeting the tax deadline so that you can contribute for the previous year.

Subtle differences – SEP-IRA vs. Solo 401(k)

It can be really difficult to select the appropriate plan because they have subtle differences. There are lots of administrative responsibilities in 401k plans but you can enjoy greater yearly contribution at same income levels. In the Solo 401(k), you can borrow up to half the plan’s amount which is a maximum of $ 50,000 but you are not entitled to any loan with a SEP IRA. So, a Solo 401k plan is the best suited for a person who is entirely self-employed or manages a one-person business. But the SEP IRA is best for part-time entrepreneur, one who owns a small business.


A lot of business owners choose the SEP IRA plan or the Solo 401(k). But the latter has two advantages over the former plan:

  • Greater retirement contributions at equal level income. This helps in maximizing the contributions and tax deductions.
  • You can opt for a tax free loan.

Both the plans are a great way to make some considerable savings after your retirement. You can choose any plan and start saving for your retirement today. These two are not the only retirement plans for the small business owners. Some other plans include regular 401(k), SIMPLE IRA plan, a traditional IRA or regular Roth. It is best to discuss with the expert professionals in this field before opting for any of the plans.

Author Bio:
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He regularly blogs at Biggerpocket, SocialMediaToday , NewWireInvetor & his own blog Self Directed Retirement Plans where he focuses on retirement planning, investment, securing future related topics.

{ 1 comment… read it below or add one }

Honolulu Aunty August 26, 2013 at 4:59 pm

This was a great post, Rick and Joe! I never knew the difference, and the benefit of borrowing from the Solo 401-K sounds awesome! Will definitely look into it.

Mahalo for the lesson,



Leave a Comment

Previous post:

Next post: