If you and/or your spouse own a business and you are the only employees, or you have 1099 income and want to maximize your retirement savings, you should consider contributing to a SEP IRA or an Individual/Solo 401(k) Plan.
Which plan is right for you? Here are some highlights of each plan.
| SEP IRA-Simplified Employee Pension Plan | Individual/Solo 401(k) | |
| Available For | You and your spouse, if you are both employees of the company | You and your spouse, if you are both employees of the company |
| Funding | Employer contributions only | Employer and employee contributions |
| Employer Contribution | Up to 25% of net earnings from self-employment (~earnings minus SEP contribution and ½ of SE tax) | Up to 25% of net earnings from self-employment (~earnings minus 401(k) contribution and ½ of SE tax) |
| Employee Contribution | Not allowed | 100% of compensation up to $19,000 or $25,000 if over age 50 in 2019 |
| Total Contribution Limit | $56,000 in 2019 | $56,000 or $62,000 if you are over age 50 in 2019 |
| Employer Deduction Options | Pre-tax | Pre-tax |
| Employee Deduction Options | None | Pre-tax or designated Roth (if custodian allows Roth contributions) |
| Establish by | Establish new account and fund up to tax filing deadline (including extensions) | Establish new account and fund by end of the tax year |
| Testing | No discrimination testing | Exempt from 401(k) discrimination testing because there are no employees |
| 5500 Filing | No 5500 filing | 5500 filing when assets in plan exceed $250,000 |
| This chart does not apply for companies with multiple employees | ||
Saving as both employer and employee may increase your contribution amount.
| Comparison of eligible contribution at $150,000 of Net Business Profit* | ||||
| Under age 50 | Over age 50 | |||
| SEP IRA | Solo 401(k) | SEP IRA | Solo 401(k) | |
| Employer Contribution | $27,950 | $27,950 | $27,950 | $27,950 |
| Employee Contribution | $0 | $19,000 | $0 | $19,000 |
| Catch-up Contribution | $0 | $0 | $0 | $6,000 |
| Total Contribution | $27,950 | $46,950 | $27,950 | $52,950 |
In some circumstances, another option called a Simple IRA might be a better choice.
*Net Business Profit is the total revenue of the business minus all expenses reported on Schedule C, C-EZ or K-1
For more information and the latest contribution limits, please check with your tax preparer and/or see:
https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people
https://www.irs.gov/retirement-plans/one-participant-401k-plans
