Bizarre however true: Amongst my cash nerd associates, maxing out our yearly retirement contributions is sort of a aggressive sport. And in relation to retirement choices for freelancers, when you’re evaluating the Solo 401(okay) to the SEP IRA, the SEP IRA is often seen because the lesser of the 2.

Why’s that? Effectively, for one, the contribution limits for a SEP IRA are decrease than that of a Solo 401(okay). And people useless set on maximizing their retirements are all about discovering methods to put aside cash for retirement. In any case, the larger your retirement contributions, the decrease your taxable earnings. In different phrases, it’ll knock down how a lot you’ll owe in taxes.

That being mentioned, as freelancers being aggressive with our retirement financial savings isn’t at all times possible. Which is why it’s essential to contemplate your choices together with contributing to a SEP IRA:

SEP IRA versus Solo 401(okay)

Let’s begin by trying on the two main sorts of retirement accounts for self-employed of us: SEP IRAs and Solo 401(okay)s.

I’ve each a SEP IRA and Solo 401(okay), and the SEP IRA was rather a lot simpler to arrange. As an example, once I arrange a Solo 401(okay), it was an extended course of with loads of paperwork. An SEP IRA often doesn’t require a lot paperwork, and it’s a comparatively fast and painless course of.

If in case you have a Solo 401(okay), you can also make each contributions as an employer and worker. Nevertheless, with a SEP IRA, you may solely make worker contributions. That being mentioned, when you’re self-employed, you in all probability don’t have any workers aside from your self.

Let’s Break it Down

In case you do have workers aside from your self, you’ll must make the identical share of contributions relative to the wage of every of your workers.

For instance, if considered one of your workers receives a $40,000 wage and one other is paid $60,000, and also you resolve to contribute 10% of their internet compensation, then worker A will obtain $four,000 annual contribution, and worker B will get $6,000.

On the subject of SEP IRAs, when you’re thought of self-employed, you may contribute as much as 20% of your internet earnings — give or take. Word you’ll want to make use of a particular calculation to determine how a lot you may contribute every year. It includes deducting a few of your self-employed taxes. The IRS has extra deets on this computation, or you may speak to an accountant to determine precisely how a lot you may put into your SEP IRA.

So how a lot are you able to contribute for a Solo 401(okay)? For 2020, on the worker aspect, you may contribute $19,500 or $26,000 when you’re 50 and over. Plus, as an employer you may contribute as much as 25% of your internet earnings. In case you’re self-employed, just like the SEP IRA, you’ll have to make use of a particular method to gauge how a lot you may put into your Solo 401(okay) plan.

Right here’s the kicker: If in case you have multiple worker, you may’t open and contribute to a Solo 401(okay). Solo 401(okay)s are designed for self-employed of us the place the one worker is you and your partner.

SEP IRAs versus IRAs

Anticipate having lower than $6,000 to squirrel away for retirement? You then won’t have to fret about opening a tax-advantaged retirement account particular to being self-employed.

IRAs can be found to anybody —you don’t need to be self-employed to open an account. What’s extra, it’s not as if it’s important to select between contributing to a SEP IRA or to a daily IRA. You may make contributions to each.


How do you go about selecting between contributing to a SEP IRA or a Solo 401(okay)? There’s actually no one-size-fits-all.

To make that call it’s important to take a handful of things under consideration. Specifically, your yearly projected earnings, how a lot you’re capable of save for retirement, and in case you have any workers.

Let’s Look At a Few Situations

In case you’re a sole proprietor or a freelancer, you won’t need to arrange a small enterprise particular retirement plan akin to a SEP IRA or Solo 401(okay) in any respect.

Let’s say your tax submitting standing is single and your earnings is projected to be lower than $65,000 in 2020. That makes you eligible to make a deductible Conventional IRA contribution as much as $6,000. And when you resolve a Roth IRA is greatest for you, and your earnings is lower than $124,000 in 2020, you’re eligible to contribute as much as $6,000 to your Roth IRA.

The SEP IRA and Solo 401(okay) choices usually come into play when you’re over the aforementioned earnings limits and are capable of contribute greater than $6,000 to retirement accounts in 2020. That is additionally the place the variety of workers you’ve gotten comes into play. “Since Solo 401(okay) ’s are particularly designed for sole proprietors with no workers, it’s usually the best choice for that situation,” says Tyler Dolan, an authorized monetary planner and vp of Keenan Monetary.

As we talked about, in a Solo 401(okay), you’re capable of contribute $19,500 for your self as a sole proprietor. And because the “employer” you may contribute as much as 25% of your compensation.

Nevertheless, in case you have a small variety of workers, a SEP IRA generally is a good match. “You’re eligible to contribute as much as 25% of your compensation to your SEP IRA, however the catch is you’re required to contribute to every of your worker’s SEP IRAs as properly,” says Dolan.

Backside Line

It’s difficult. If in case you have questions, it’s greatest to speak to a monetary planner to determine the perfect route for you.

As a result of I care about maximizing contributions and I solely have myself as an worker, I’ve each a SEP IRA and solo 401(okay) arrange. Even so, conditions can at all times change. In the end, it’s greatest to remain on prime of your retirement targets and make tweaks alongside the way in which.


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