BERKELEY HEIGHTS, N.J. (TheStreet) -- On the surface, a SEP IRA appears to give a self-employed person the same benefits as an individual 401(k), with both types of retirement plans allowing for a maximum contribution of $49,000 this year. There are subtle differences that might make the individual 401(k) a better option for self-employed people, though.An individual or solo 401(k) plan is essentially for one-person firms -- ones with no second full-time employees. (Spouses are an exception to the no-other-full-time-employees rule.) The beauty of these plans are that they are essentially 401(k) plans, but with lesser administrative requirements than a multiperson version. For example, a solo 401(k) plan is not subject to discrimination testing and not required to begin filing IRS Form 5500 E-Z until plan assets reach $250,000.
|There are subtle differences from a SEP IRA that might make the individual 401(k) a better option for self-employed people.|
- has an over-age-50 catch-up provision of $5,500, potentially increasing the annual maximum to $54,500 ($49,000 plus $5,500)
- can allow for Roth contributions
- can allow for loans
- can result in higher dollar contribution than SEP IRA at the same income level.
- Net profit from self-employment: $100,000
- Half of self-employment tax: ($7,065)
- Net earnings from self-employment: $92,935
- Self-employed rate: 20%
- SEP IRA contribution: $18,587
- Allowable elective deferrals: $16,500
- Solo 401(k) contribution: $35,087