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Is a solo 401( k) better than a SEP IRA?

I such as SEP IRAs as well as have advised them to particular clients. Like the solo 401( k), you can add up to $52,000 right into a SEP IRA per year, yet your earnings must be considerably greater to get to that degree of financing.

Her organisation revenue, or internet Arrange C, last year was $130,000. If Jill were to open up a SEP IRA to conserve through her organisation, the IRS would certainly make her use the adhering to calculation:

( Net timetable C - 1/2 of self-employment tax) x 20% =

If Jill were to open a solo 401(k), she might add $17,500 for herself plus the $24,241.96 for profit sharing (exact same quantity as SEP above) as well as include the $6,500 catch up provision since she is over 50. That is an overall of $48,241.96 in the Solo 401(k) as well as only $24,241.96 for a difference of over $24,000!

For a person around that revenue level, the solo 401(k) can really assist delay even more money. Solo 401(k)s likewise permit owners to open a Roth 401(k). Right now, there is no Roth SEP. Once you have a balance of over $250,000 in your Solo 401(k), you are needed to submit a form 5500 EZ every year.

What entities can establish a solo 401(k)?

Sole proprietorships, Partnerships, llcs, and also corporations can prepared up solo 401(k)s. You must pay yourself W2 salaries to be able to contribute to a solo 401(k)if your company is a company. The earnings sharing payment can just be based upon your W2 incomes. If Jill decided to incorporate and also paid herself a W2 salary of $70,000 and also took the continuing to be $60,000 of earnings as a returns, she might still conserve $24,000 ($17,500 + $6,500 catch up) as a staff member, yet her profit sharing would certainly be restricted to $17,500 ($70,000 x. 25). That is less than what she could add in our sole proprietorship instance, yet still $24,000 more than what she can contribute to a SEP if she paid and also was a corporation W2 incomes of $70,000.

When must I establish a solo 401(k) plan?

Occasionally, I do not meet people until the year is over and it is too late to establish a solo 401(k) plan. Both the SEP and solo 401(k) allow you to make large contributions when you have the profits in one year and do not require contributions if you have lean years.

How do I determine my self-employment tax?

The easiest way is to fill in Set up SE with your 1040 or make use of a self-employment tax obligation calculator.

What else should I know?

Solo 401(k)s are developed for companies where there is only one individual operating in business. You can establish one up, however you will likely need to terminate the strategy when you hire your very first employee. At that point, you can take into consideration either a routine 401(k) plan, SEP Individual Retirement Account, or STRAIGHTFORWARD Individual Retirement Account for your service. A few of the guidelines related to solo 401(k) strategies can be intricate. It is suggested that you speak with IRS Magazine 569 as well as your tax expert prior to continuing.


Like the solo 401( k), you can add up to $52,000 into a SEP IRA per year, however your income has to be significantly higher to obtain to that degree of funding. If Jill were to open up a solo 401(k), she might add $17,500 for www.solo401k.com herself plus the $24,241.96 for revenue sharing (same quantity as SEP above) and also include the $6,500 catch up provision due to the fact that she is over 50. Solo 401(k)s also permit owners to open up a Roth 401(k). Both the SEP as well as solo 401(k) permit you to make huge contributions when you have the earnings in one year as well as do not call for contributions if you have lean years.

Solo 401(k)s are made for services where there is only one individual working in the service.