What is a Solo 401k vs SEP IRA?

Whenever we think of a retirement plan for small businesses, two plans come in the mind of a person whether to go with a solo 401 (k) or SEP IRA. But people generally are confused between what is a solo 401k vs sep ira, therefore we are going to explain both here and you can choose between the two according to the advantages you will have for one retirement plan over another. If we see both SEP-IRAs and solo 401 k plans are tax-deferred retirement saving plans and are similar to one another. Therefore go through this article to check the difference between the two.

What is a SEP IRA?

A SEP IRA is a retirement saving plan which is just like a traditional IRA which is tax deductible. They have a higher contribution limit which is 25% of your compensation or a maximum of $57,000 in a year. It is an IRA in which there is an employer contribution. Investment on SEP IRAs are tax deferred until you retire and the distribution will be taxed on the income you receive after retirement.

Who is eligible to open SEP IRA’s?

This plan is best suited for the owner of a small business who has very few employees or no employees at all. In this plan there is equal contribution from the employee and employer’s end. The eligibility criteria to open an SEP IRA are:

  • Person should be more than 21 years of age.
  • He should have worked at least with you for a minimum of three years in the total.
  • He should have earned a minimum sum of $600 last year from the employer.

If the employee satisfies all the above given conditions, then he is an eligible candidate for opening a SEP IRA. The equal contribution from both ends means that SEP IRAs are best suited for self employed people or small business owners who are planning for their retirement savings.

What are the advantages of SEP IRA?

Let’s look out for some of the advantages of SEP IRA in below mentioned points:

  • It is the best plan for self employed people who don’t have any option for their retirement savings.
  • They are tax deferred and only taxable on withdrawing the money.
  • As the contribution limits are higher than traditional IRA’s and 401 (k), so you will save more for your retirement.
  • The contributions are not mandatory to be made every year.
  • It is really easier to set up than any other plan.

What is a Solo 401 (k) Plan?

Solo 401 (k) is also one of the plans for self employed people much like SEP IRA, but in this plan the owner can open a solo 401 (k) if the business partners in their business is their spouse only or there is no employee in the company. It is necessary to set up a solo 401 k by December 31st for the year you are going to contribute.

What is the eligibility criteria for Solo 401 (k)?

If you want to open a solo 401 (k) retirement saving plan, you will need to fulfill some criteria to become eligible which are mentioned below:

  • The freelancers or small businesses with no employees are eligible to open a solo 401 (k) retirement saving accounts.
  • You must have a record of the income. If you pay your taxes regularly it can be shown as a proof of the income.

If you qualify the above mentioned points, it will be good to go for a solo 401 (k) plan.

What is the contribution limit for Solo 401 (k) 2020?

The contribution limit for solo 401 (k) is $57000 in the current year. If you are aged more than 50 years, then there is a catch up limit of $6500.

What are the benefits of Solo 401 (k)?

Here are some of the advantages of opening of the solo 401 (k):

  • The contribution limits for solo 401 (k) are higher among the other traditional 401 (k) plans.
  • You can choose between Roth 401 (k) and simple 401 (k) to get the tax advantages as per your income.
  • You can also take a loan in case of emergencies from your 401 (k) plan.

What is the difference between the SEP IRA and Solo 401 (k) plan?

As now we have got the information about the SEP IRA and Solo 401 (k) plan, let’s look out for the major difference between the two in the following table.

SEP IRA Vs Solo 401k Chart

Plans SEP IRA Solo 401(k)
People who can take the plan Self-employed individual or small business owner, who have fewer employees, Available to partnerships, sole proprietors, S corporations , C corporations Self-employed individual or business owner who have no employees other than their spouse, Available to partnerships, sole proprietors, S corporations , C corporations
Benefits It is easy to maintain and open with wide range of investment choices A 401 (k) plan with higher contribution limit with wide range of investment option
Contributors Funded solely by employer contributions Funded by employee deferrals and employer contributions
Employee contribution limits 2020 NA Up to $19,500 in salary deferrals; $26,000 for the age> 50 years
Employer contribution limits 2020 Up to 25% of income up to a $57,000 Employers can contribute up to 25% of their income up to $57,000. Total employer/employee contributions should not exceed $57,000.
Deadline to Make Contributions April 15 December 31


In the end we can say that both the plans are good for small business owners, if you have employees working you should go with SEP IRA and if you are sole owner with your business with no employee Solo 401 (k) can be a better option.

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