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  • Writer's pictureSamantha Diggs

SEP IRA vs. Solo 401(k): Which is Right for You?

Updated: May 4, 2022

Are you a small business owner or self-employed and looking for retirement planning options? If so, you might want to pick a plan that is designed specifically for people like you. A plan that fits your needs and has tax advantages to help your business. For small businesses retirement planning, the debate can sometimes come down to SEP IRA vs Solo 401(k) and which will work better for your business.


SEP IRA

SEP IRA (Simplified Employee Pension) plans are aimed at those self-employed or own very small businesses. This type of plan only allows the employer to make contributions on behalf of employees. The IRS has specified guidelines as to what employees must be covered by a SEP IRA. The contributions are flexible and can be decided upon each year by the plan sponsor. Contributions can range from 0% to 25% of eligible payroll up to a maximum of $61,000 per employee in 2022 based on the level of compensation. The SEP IRA does not provide the additional catch-up like the Solo 401(k) does. The employee has full entitlement to the account, however, there are IRS guidelines as to when they can withdraw the funds. While the funds are in the SEP the employer controls where they are invested.



Solo 401(k)

Solo 401(k) plans are available for those who are self-employed or whose business only has one other employee, which is the owner’s spouse. Solo 401(k) plans allow for both employer and employee contributions. This allows for larger contributions since you can contribute as both. The contribution limit as an employee in 2022 is $20,500. As an employer, you can contribute up to 25% of your adjusted net earned income in addition to your salary deferrals, however, the combined maximum is $61,000 in 2022. An additional catch-up contribution of up to $6,500 is also available to employees who are age 50 or older allowing them to save up to $67,500 in 2022. Both Roth and traditional solo 401(k) plans are available. These plans must meet the same requirements and follow the same rules as any other 401(k) plan.

The Solo 401(k) provide more flexibility in limiting who is covered based on eligibility and allows you to put a vesting schedule on the employer contributions as well as it allow more flexibility for accessing the funds while still in-service (Hardship withdrawals, Loans, 59 1/2 withdrawals, among others)



SEP IRA vs Solo 401(k)

So now that you know the difference between the two plans, next is deciding which plan is right for you.


SEP IRA is right for you if:

  • You plan on hiring additional workers.

  • You want a plan with little administrative work.

  • Lower contribution limits are not a problem(owners are under age 50).

  • Not allowing employees to defer and help themselves save for retirement.

  • Not being able to save on an after-tax basis with Roth Contributions is ok.

  • Catch-up contributions are not needed.

  • You are fine that all contributions are immediately vested for all employees.


Solo 401(k) is right for you if:

  • Individual Tax savings and Employer benefits are important to you.

  • Employee contributions are a valuable option.

  • Catch-up contributions are desired.

  • Saving on an after-tax(Roth) basis is desired.

  • You may want to take a hardship withdrawal from your plan.

  • You may want to use your plan for a loan.

  • Flexibility of who is covered is important.

  • Having a vesting schedule on the Employer money is important to you.

  • Reporting requirements are limited.



No matter which plan you choose it is important to get help from a trusted professional. RPCSI offers a wide range of retirement plan solutions, including solo 401(k)s. We manage the administrative work that might make people reconsider solo 401(k)s so they can focus more on running their business and saving as much as they can for their retirement. If you need additional help deciding which plan is right for you and your business or setting up your solo 401(k) plan, contact RPCSI today!



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