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