If you and/or your spouse own a business and you are the only employees, or you have 1099 income and want to maximize your retirement savings, you should consider contributing to a SEP IRA or an Individual/Solo 401(k) Plan.

Which plan is right for you? Here are some highlights of each plan.

SEP IRA-Simplified Employee Pension Plan Individual/Solo 401(k)
Available For You and your spouse, if you are both employees of the company You and your spouse, if you are both employees of the company
Funding Employer contributions only Employer and employee contributions
Employer Contribution Up to 25% of net earnings from self-employment (~earnings minus SEP contribution and ½ of SE tax) Up to 25% of net earnings from self-employment (~earnings minus 401(k) contribution and ½ of SE tax)
Employee Contribution Not allowed 100% of compensation up to $19,000 or $25,000 if over age 50 in 2019
Total Contribution Limit $56,000 in 2019 $56,000 or $62,000 if you are over age 50 in 2019
Employer Deduction Options Pre-tax Pre-tax
Employee Deduction Options None Pre-tax or designated Roth (if custodian allows Roth contributions)
Establish by Establish new account and fund up to tax filing deadline (including extensions) Establish new account and fund by end of the tax year
Testing No discrimination testing Exempt from 401(k) discrimination testing because there are no employees
5500 Filing No 5500 filing 5500 filing when assets in plan exceed $250,000
This chart does not apply for companies with multiple employees

Saving as both employer and employee may increase your contribution amount.

Comparison of eligible contribution at $150,000 of Net Business Profit*
Under age 50 Over age 50
SEP IRA Solo 401(k) SEP IRA Solo 401(k)
Employer Contribution $27,950 $27,950 $27,950 $27,950
Employee Contribution $0 $19,000 $0 $19,000
Catch-up Contribution $0 $0 $0 $6,000
Total Contribution $27,950 $46,950 $27,950 $52,950

In some circumstances another option called a Simple IRA might be a better choice.  Stay tuned for an upcoming blog article which will focus on Simple IRA’s.

*Net Business Profit is the total revenue of the business minus all expenses reported on Schedule C, C-EZ or K-1

For more information, please check with your tax preparer and/or see:
https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people
https://www.irs.gov/retirement-plans/one-participant-401k-plans

Written by Andi McNamara, CFP® Director of Financial Planning at Wingate Wealth Advisors