Best Retirement Plans When Self Employed: SEP vs. Solo 401(k) & More

As you plan for the future, it’s important to pick the best retirement plan for a self-employed business owner. This video compares several choices and then focuses on a Solo 401(k) vs. SEP IRA. The reason for that is that accountants have traditionally suggested SEPs, but a SoloK might offer more functionality.
That said, you can keep things simple if your plan to save a relatively small amount each year. An IRA might be all you need, but be mindful of the ability to deduct contributions or your eligibility for Roth contributions.
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SEPs and Solo 401(k) plans both allow for employer contributions. The amount is similar, but things diverge quickly from there. A SoloK also allows for catch-up contributions and salary deferral contributions, which can increase your savings significantly each year.
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Plus, if you’re looking to maximize Roth contributions, some individual 401(k) plans can take voluntary after tax contributions, enabling the “mega backdoor Roth” strategy. That alone might make a 401(k) the best retirement plan option for your self-employment income.
Continuing the comparison of SEP vs. Solo 401(k) plans, we review things like loans, costs, the administrative burden, and more. By the end of the video, you should have a decent idea of what plan makes the most sense for you.
More on this topic:
Self employed adjustment www.irs.gov/retirement-plans/...
SoloK Deadline: • 2021 Solo 401k Plan Es...
IRA income and deduction limits: www.irs.gov/retirement-plans/...
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CHAPTERS:
00:45 Does an IRA Make Sense?
02:34 SEP vs. SoloK Features Side-by-Side
03:20 Total Contribution Limits
03:54 Employer Profit-Sharing Contributions
04:39 SoloK: Bigger Contributions With Less Income
06:13 Employee Salary Deferral (Roth Allowed)
07:16 Voluntary After-Tax Contributions
07:40 401(k) Plan Loans
08:05 Deadlines to Establish a Plan
10:19 401(k) Max Contribution Example
12:47 Mega Backdoor Roth for Solo 401(k)
14:24 Costs for SEP vs. Solo 401(k) Plans
15:18 How Compensation Works With Self-Employment Tax
16:53 No Income Limits for Eligibility to Contribute
17:16 What if You Hire?
18:52 Solo 401(k) vs. SEP Paperwork Requirements
19:50 SIMPLE IRA Plans
20:36 Investment Options - Any Better?
IMPORTANT:
Tax laws are complicated and they change over time. Get updated information from a tax expert familiar with your situation before you make any decisions. It's impossible to cover everything you need to know in a video like this. The only thing that's certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. This video is not a substitute for individualized, personal advice. Please verify with your plan administrator and document providers when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. “Likes” should not be considered a positive reflection of the investment advisory services offered by Approach Financial, Inc. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration.

[@kwaichangcaine8234]

Great information

[@user-py7wp6nw9h]

Thank you as always

[@davidfolts5893]

These were very helpful while I was self-employed. Excellent information for folks to consider.Great video, Justin!

[@ApproachFinancial]

Thank you, David. Great to hear you were able to use those plans. Hopefully the retirement income crowd here won't mind the occasional video about the accumulation phase!

[@blackbeardpapa9547]

love this. I am self employed, but I started late, about 10 years ago. I'm 10 years away from that retirement deadline....

[@kwaichangcaine8234]

I'm self employed too and I got started a little late with saving, I am 63 now but I am glad I got started.

[@BreatheWithDinoo]

Hi you’re videos are informative thank you. My question -> can LLC business owners contribute to BOTH a SEP-IRA and a Solo401K in the same tax year? If yes, then will there be contribution limits?

[@ApproachFinancial]

Thank you! So, it is possible to do both in the same year, but as you mention, the limits get tricky depending on which employer(s) the plan is for. The rules are more convoluted than I can get into in comments like this, unfortunately. Note that if everything is for the same employer/business, you might not need both plans. In some cases, a Solo-k is sufficient and simpler than having two plans. But some people want to use different plans that offer different investment options, so they do it anyway. The key is to figure out your maximum limits and follow any IRS rules that apply.
Briefly, I'd say I'm not optimistic about trying to double the $66k limit (for 2023, under age 50) if you're self-employed and trying to use both plans for the same business (or possibly even the same business owner). But I might not be understanding the situation, and again, it gets complicated so this response is certainly not enough for anybody to make a big decision.

[@polymath5119]

Hi Justin. You mentioned employer contributions to a Solo K having to be pretax. Doesn't SECURE 2.0 enable them to be Roth in the future after those rules are in place?

[@ApproachFinancial]

Yes, at some point, larger plans may make matching contributions to employee Roth accounts, but I haven’t seen anything yet on how that might apply to solo plans. I’m not sure I’ve really seen matching on a SoloK-it’s typically salary deferral with a pre-tax employer contribution, and the IRS doesn’t address matching on solo plans to my knowledge (www.irs.gov/retirement-plans/one-participant-401k-plans).
But you don’t necessarily have to wait for the rules to get clarified and for vendors to update their systems. Currently, you can set up an individual 401(k) plan with voluntary after-tax deferrals and convert those dollars to Roth without an additional tax liability (also known as “mega” backdoor Roth, as you might already know). That allows you to put away up to $66k for 2023-all as Roth, if you wanted and if you have the eligible income. Whether you’re matching yourself or doing voluntary aftertax contributions, it’s your money either way, and most people (unless they earn several hundred thousand or more, and even then the max is the max) can get more into the plan with the mega strategy.
As always, different people might read these comments at different times, so it's critical for anybody reading to triple-check with their tax professional before making any decisions or taking action. These comments may be incomplete, inaccurate, out of date, or not applicable to your situation.