Self-employed workers wear many hats. Accounting, administrator, you give it a name. And that doesn't even include retirement savings.
Depending on your income, you can benefit from your IRA tax benefits, but some people are quickly violating the $7,000 contribution limit. They may (or need) want to save more.
So what do gig workers, small business owners, or solo practitioners do?
Luckily, the two accounts offer up to 10 times the capacity of tax-favoured investments: the Solo 401(k) and the SEP IRA. Generally, SEPs tend to be better for business owners who plan to hire employees in the future. Solo, on the other hand, often makes sense for self-employed people with no non-spouse employees.
However, what's best for you depends on your business model, income level and financial goals. So, to help you make your choice, let's compare these accounts in three categories.
High contribution limits
Every year, you can donate roughly the same (over $70,000) to each account type, but Solo has a slight edge in two cases.
- Case #1: You are over 50 years old and have a catch-up. In this case, the SOLO 401(k) offers an additional catch-up contribution of $7,500 each year, or $11,250 between the ages of 60 and 63.
- Case #2: Let's say you're a supersaver and you're far more than standard advice with a savings rate of 10-15%, but you're earning less than $280,000. In this scenario, you will be able to save more on solos. Because not only can you donate up to 25% of your income as an employer (same as a SEP), but using a Solo 401(k) will allow you to contribute up to $23,500 as an employee.
Advantage: Solo 401 (k)
A simple administrator
Simply put, the Solo 401(k) requires more work to set up. Unlike SEPIRA, annual reporting is required if your balance exceeds $250,000. However, there is a big caveat here. If you have a trusted advisor and a truly modern solo 401(k) that is offered like ourselves, they can handle heavy lifting of the setup and keep them compliant all year round and year round.
That's why it offers the Solo 401(k) as an exclusive Betterment premium offering. Premium places a team of advisors in the corner. Experts can not only help with everything, but also help you decide whether to open one in the first place. If you decide that a better solo 401(k) is right for you, a paperless and enjoyable experience awaits you.
Benefits: Ties
Place a team of advisors in your corner with premium.
Flexibility
Both SEP and solo offer flexibility, but in a variety of ways. For example, the Solo 401(k) allows for Roth (aka post tax) and/or traditional contributions.
However, the ability to continue to expand and save money depending on your business goals may be the type of flexibility that matters most to you. In general, SEPs quickly transition from solo practitioners to employers, contributing on behalf of employee SEP IRAs. The only catch is that you have to donate the same amount to yours to the SEP.
However, with Betterment's Solo 401(k), our advisors can move their plans to Group 401(k) if they hire employees beyond their spouse. Group 401(k) requires more work to manage, but offers more flexibility than SEPs in how you build your contribution to you and your employees.
Benefits: Ties
So which account is right for you?
The good news is that both SEP IRAS and SOLO 401(k) offer excellent tax benefits and help you reach retirements faster. Both are provided with Betterment, allowing you to easily open either. Because when you are self-employed you are busy running your business. Would you like to optimize your retirement savings? Consider that there are fewer wardrobe hats.
