Thinking of Converting Your SEP IRA to a Solo 401(k)?

by Peter Rizzo

Life Settlements in a Retirement Account? Think Again.

This is the time of year people start planning for next year and wrapping up the end of the year.  We get many calls about converting SEP IRAs to Solo 401(k)s.

Changing your SEP IRA to a Solo 401(k) can be a beneficial financial move for some individuals, but it’s not the right choice for everyone. The decision should be based on your specific financial goals, circumstances, and needs.

Here are some reasons why you might consider making the switch:

Greater Contribution Limits: Solo 401(k)s typically allow for higher annual contribution limits compared to SEP IRAs. In 2021, for instance, you can contribute up to $19,500 to a Solo 401(k) as an employee, plus an additional 25% of your net self-employment income as an employer contribution, up to a total of $58,000 (or $64,500 if you’re 50 or older). In contrast, SEP IRAs only allow for employer contributions, which are limited to 25% of your net self-employment income, up to $58,000.

Catch-Up Contributions: If you’re 50 years old or older, Solo 401(k)s also allow you to make catch-up contributions, which can further increase your retirement savings.

Potential for Roth Contributions: Some Solo 401(k) plans offer a Roth subaccount, which allows you to make after-tax contributions that can grow tax-free and be withdrawn tax-free in retirement. SEP IRAs do not offer this feature. We build this feature into all our plans.

Loan Options: Solo 401(k)s often allow you to borrow against your account balance in certain situations, providing you with access to funds if needed. SEP IRAs do not offer this feature.

Flexibility in Investment Choices: With a Solo 401(k), you may have more investment options and flexibility compared to a SEP IRA, depending on the plan provider you choose. This can allow for greater diversification and potentially higher returns.

Control and Administration: Solo 401(k)s provide more control and flexibility in terms of plan administration and investment choices. With a SEP IRA, your employer contributions are typically invested in the same manner as your traditional IRA investments.

Ability to Consolidate Accounts: If you have other retirement accounts, such as traditional IRAs, you can potentially consolidate them into a Solo 401(k), simplifying your retirement savings and investment management.

It’s important to note that Solo 401(k)s also come with certain administrative requirements and potentially higher costs than SEP IRAs, depending on the plan provider. Additionally, eligibility for a Solo 401(k) may depend on factors like your self-employment income and business structure.

Before making the switch, it’s advisable to consult with a financial advisor or tax professional to assess your specific situation, understand the implications, and ensure that a Solo 401(k) is the right choice for your retirement planning needs.

If you would like more information email or to set a time for a call, you can click here.



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