5 Ways the Solo 401(k) is Better than a SEP IRA

By Peter Rizzo

Every day, clients ask how they can get checkbook control of their SEP. While you can set up a SEP CheckBook IRA, the Solo 401(k) is a much better option, as you will see below. It’s a much stronger plan and gives you many more options to maximize your income deferment and investment options.

1 | Reach your Maximum Contribution Amount Faster

A Solo 401(k) includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan. A plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000. A SEP IRA would only allow for a profit sharing contribution.

2 | Catch-up Contributions with Solo 401(k)

With a Solo 401(k), you can make a contribution of up to $53,000 to the plan each tax year ($59,000 if the participant is over the age of 50) in 2015 and 2016. However, with a SEP IRA, the maximum amount that can be deferred is $53,000 since a SEP IRA does not offer any catch-up contributions.

3 | Roth Feature

A Solo 401(k) plan can be made in pre-tax, after-tax or Roth format. SEP IRA contributions can only be made in pre-tax format. SEP IRA contributions can then be converted to a Roth IRA, but the initial SEP IRA contribution must be in pre-tax. In addition, a contribution of $18,000 ($24,00, if the plan participant is over the age of 50) can be made to a Solo 401(k) Roth account directly.

4 | Tax-Free Loan Option

With a Solo 401(k), assuming your plan documents allow for it, you can borrow up to $50,000 or 50% of your account value, whichever is less. With a SEP IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.

5 | Use Nonrecourse Leverage and Pay No Tax

With a Solo 401(k), you can make a real estate investment using a nonrecourse loan without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax.

As you can see, the most powerful retirement savings option is the Solo 401(k). Find out today how to qualify.

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2 Comments

    • Jordan Sheppherd

      We charge an annual plan document compliance fee of $200 per plan. The annual fee can be paid by the 401(k) or by your business. If you pay it from the business, you can deduct it.

      Reply

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