SEP IRA or Solo 401(k)?

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Self-directed investors who own small companies (ten employees or less) often compare the benefits of a Solo 401(k) with those of a SEP IRA. Below is a comparison of the two plans and their unique benefits to employees and employers:

What is a SEP IRA?
Simplified Employee Pensions, or SEP IRAs, are popular employer plans for self-employed individuals. With a SEP IRA, you can choose the percentage of contribution for any given year (0-25% of earned income) for yourself and your staff. The only requirement is that the contribution percentage, in any year, be the same for each employee. Additionally, SEP IRA contribution limits are typically higher than those of Traditional or Roth IRAs.

What is a Solo 401(k)?
A Solo 401(k) is simply a 401(k) plan for companies with one staff member - the account holder. Solo 401(k)s are no different from their employer-sponsored counterparts from a contribution limit and tax advantage standpoint. However, with a Solo 401(k), the employer, trustee, and participant are often the same person. For self-employed persons or companies with no qualifying employees, a Solo 401(k) plan allows the employer/participant to make higher annual contributions and exercise a greater degree of flexibility when acquiring assets.

What is the difference?

  • A SEP IRA requires an IRA custodian to maintain the paperwork and bookkeeping of the account, per IRS rules. This is where it's important for retirement investors to find a self-directed IRA provider who can suitably administer SEP IRAs that hold alternative investment options. Conversely, owners of a Solo 401(k) can serve as their own trustees and administrators. As such, their heightened involvement will carry additional responsibilities. This can be especially true for real estate, as disqualified persons and prohibited transactions rules can be complex for this asset type. At New Direction Trust Company, Solo 401(k) holders may solicit our bookkeeping services to help mitigate headaches. They can also lease our plan document and conduct bookkeeping themselves, or request "full service" with the document lease and bookkeeping both included.
  • SEP IRAs can be funded via contributions, transfers from other IRAs, and rollovers from other qualified employer plans. Solo 401(k)s can be funded by a combination of employer and employee contributions, in which case both parties may derive a tax benefit. Annual contribution limits are higher for Solo 401(k)s than for individual accounts, including SEP IRAs if you're over the age of 50.
  • SEP IRAs can also have significantly lower start-up costs than other retirement plans. Solo 401(k)s can be a little more complicated, but their holders can choose to incorporate Roth contribution provisions, loan provisions, etc.

Both plans offer a distinct suite of benefits that can promote the retirement success of self-employed investors. Please don't hesitate to give us a call at 877-742-1270 or send us an e-mail at to learn more about these account types and the many other account types available for self-direction.