The SEP (Simplified Employee Pension IRA) is an account for anyone who is self-employed, owns a business, or earns freelance income. This is available for a variety of types, including sole proprietorships, partnerships, LLCs, S-Corps, and C-Corps.
An eligible employee (including the owner) must be at least 21, have worked for the employer at least 3 of the past 5 years, and received at least $750 in compensation in 2024. The maximum contribution for 2024 is the lesser of $69,000 or up to 25% of compensation or net self-employment earnings, with a $345,000 limit on compensation that can be used to factor the contribution.
The Solo 401(k) is a single participant plan. This covers a business owner with no other employees, and his or her spouse. The maximum contribution is the same at $69,000. Of course, you have the catch-up bonus of $6,500 per year for those 50 and older, bringing to total maximum to $75,500.
Solo K maximum allowable contribution is calculated a little differently than the SEP. The owner can “double-dip,” and make contributions as an employee and an employer. The employee contribution is up to 100% of the compensation (earned income), up to the annual limit of $23,000. Think of this as deferred comp. The employer non-elective contribution is up to 25% of compensation as defined by the plan, or up to 25% of net earnings for self-employed (think Sch C or active LLC partner). The Solo K has a reporting requirement once the account balance hits $250,000.
The Solo K might be better for side hustlers or part-time gig workers since you can borrow from the plan, can contribute more each year, and you can invest in your employer’s 401(k) if you also have a regular job.
The SEP IRA may be better if you are going to hire an employee or want the flexibility of deciding whether to contribute each year, and at what rate. The SEP also allows for a Roth component in the same plan.
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