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Choosing the right retirement account is essential for meeting your financial goals. Two popular options for self-employed individuals are the SEP IRA and the Solo 401(k). Understanding their features can help you decide which is best for your retirement planning.
SEP IRA
The Simplified Employee Pension (SEP) IRA is a retirement plan that allows self-employed individuals to contribute. It is easy to set up and maintain, making it a popular choice for small business owners and freelancers.
Contributions are tax-deductible, and the contribution limits are based on a percentage of your income. The maximum contribution for 2023 is 25% of compensation or $66,000, whichever is less.
Solo 401(k)
The Solo 401(k) is designed for self-employed individuals with no full-time employees other than a spouse. It offers higher contribution limits and more flexibility compared to the SEP IRA.
In 2023, you can contribute up to $22,500 as an employee, with an additional 25% of your net earnings as an employer, up to a total of $66,000. It also allows for Roth contributions and loan options.
Comparison of Features
- Contribution Limits: Solo 401(k) generally allows higher total contributions.
- Flexibility: Solo 401(k) offers more investment options and Roth features.
- Ease of Setup: SEP IRA is simpler to establish and maintain.
- Required Minimum Distributions: Both plans require RMDs starting at age 73.