23 Apr What’s better? A SEP-IRA or a Solo 401(k)?
Q. I’m self-employed. How do I decide on the right retirement account: a SEP-IRA, or a Solo 401(k) or a regular IRA?
A. It’s great that you want to save for retirement.
We’re going to assume that you don’t have any employees.
Choosing the right plan for you depends on the amount you want to contribute and what your income is for the year, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.
“A SEP-IRA is easy to set up and operate,” D’Agostini said. “The contributions are flexible, and you can contribute up to 25 percent of your pay.”
She said the contributions can vary each year, which is nice if your business has uneven cash flows. There are no filing requirements and loans are not permitted from these accounts.
Then there’s the Solo 401(k).
If you make a high income, the Solo 401(k) will allow you to save more towards retirement, especially if you are 50 years of age or over, said Sheri Iannetta Cupo, a certified financial planner with SageBroadview in Morristown.
“Once you open a plan, schedule automatic contributions to it from your business checking account, just as if you signed up for your employer’s 401(k) and had automatic deductions coming from your paycheck,” Cupo said. “Be careful that you don’t overfund. You may want to contribute a `safe’ amount then top it off to the maximum permissible once your accountant finalizes your self-employed income for the year.”
The Solo 401(k) allows you to put in 100 percent of compensation or earned income up to the annual contribution amount, which for 2015 is $18,000, or $24,000 if you are age 50 or over, D’Agostini said.
Earned income is net earnings from self-employment, less half the self-employment tax and contributions that you made for yourself. You can also contribute the `employer non-elective contribution,’ which is 25 percent of compensation as defined by the plan,” D’Agostini said.
“Normally, 401(k) plans need to perform annual nondiscrimination testing, but this requirement goes away for those that are self-employed,” she said. “Total contributions cannot exceed $53,000 for 2015. There is an annual filing requirement of Form 5500-SF when the assets accumulate to $250,000 or more.”
Cupo suggests you try this BankRate.com calculator for help in the contribution calculation.
If you eventually have employees other than your spouse, Cupo said, you won’t be able to use a Solo 401(k) any longer.
“It would have to be converted to a regular 401(k) plan,” she said. “You would be able to continue to contribute to your SEP but would eventually have to contribute to your employee’s SEP-IRA accounts, too.”
You can still contribute to an IRA in addition to the Solo 401(k) or the SEP-IRA, but the IRA limits your contribution to $5,500 in 2015, or $6,500 if you’re age 50 or over.
Good luck with your savings plans!
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This story was first posted in April 2015.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.