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Small enterprise homeowners have a number of choices to select from in relation to retirement planning. SEP IRAs have been launched as a solution to let small enterprise homeowners set up retirement accounts for his or her companies. Monetary laws created the Solo 401(ok), which additionally affords a simplified approach for enterprise homeowners to avoid wasting for retirement and revel in a few of the advantages of an employer-sponsored 401(ok) plan.
A self-employed enterprise can open a SEP IRA and a Solo 401(ok) plan and contribute to each plans. Each are tax-deferred retirement methods. The SEP-IRA permits people to avoid wasting as much as 25% of their earnings into the account. With a solo 401(ok), people can save as much as 100% as an worker contribution, as much as the annual greenback threshold, and in addition acquire employer contributions of as much as 25%.
Key Takeaways
SEP IRA vs. Solo 401(ok)
SEP IRA
SEP IRAs have been round for many years, and they’re in all probability nonetheless the only approach for enterprise homeowners to avoid wasting for retirement. These plans are purely profit-sharing in nature and permit homeowners to contribute for themselves and all eligible staff.
The quantity that may be contributed is the lesser of as much as 25% of enterprise income—20% within the case of a sole proprietorship or a single-member restricted legal responsibility company—or a set greenback quantity adjusted for inflation yearly ($66,000 for 2023 and $69,000 for 2024.)
One of many predominant benefits of SEPs is their relative simplicity in contrast with the rigorous reporting necessities that include certified plans, even these which are designed for self-employed individuals, akin to Keogh plans.
SEP IRAs do enable employers to make retirement plan contributions on behalf of staff, although they’re allowed to exclude part-time employees, these underneath age 21, and those that haven’t labored for the employer in at the least three of the earlier 5 years.
Contribution limits are the identical as for the proprietor, besides that it’s the lesser of the greenback restrict or 25% of the worker’s whole compensation. SEP IRAs can be established at any time earlier than the enterprise proprietor recordsdata a tax return.
Solo 401(ok)
Solo 401(ok) plans are a comparatively current addition to the retirement plan group. These plans are designed completely for sole proprietorships which have just one worker (the proprietor).
Often known as an “particular person” or “self-employed” 401(ok) plan, this sort of retirement financial savings account is usually thought-about a greater possibility for solo practitioners than a SEP IRA as a result of it additionally affords the next options:
Worker deferrals: In contrast to SEP plans, solo 401(ok)s enable members to make a separate worker contribution in addition to a profit-sharing contribution. This enables the proprietor to contribute as much as $22,500 to the plan for 2023 and $23,000 for 2024, even when the enterprise loses cash in these years.Catch-up contributions: A solo 401(ok) permits the identical quantity to be contributed by the proprietor as a SEP (see limits above), but it surely additionally permits members who’re age 50 and above to contribute a further $7,500 for 2023 and 2024 as catch-up contributions.Roth contributions: Solo 401(ok) plans enable for post-tax Roth contributions, which might enable the proprietor to build up a considerable pool of tax-free cash over time. SEP IRAs solely enable conventional pretax contributions.Mortgage provision: Solo 401(ok) plans can enable members to take out a mortgage equal to the lesser of fifty% of the plan stability or $50,000. Loans should not accessible with SEP plans.
Solo 401(ok) contributions have to be made by December 31 of the earlier yr to be counted on the tax return.
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