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Solo 401k vs SEP IRA for Sole Proprietor
Posted on 1/23/23 at 10:55 am
Posted on 1/23/23 at 10:55 am
This is for a side gig. Trying to decide if there is any benefit of these 2. I max 401k through work, so there will not be an employee contribution component. Say I make $40k a year on the side, is one option better than the other?
3
Posted on 1/23/23 at 10:58 am to GeauxTigers777
With SEP IRA- can do 25% of gross. So 10k max on the year if paying yourself 40k.
Not sure the rules on Solo 401k
Not sure the rules on Solo 401k
Posted on 1/23/23 at 11:01 am to Billy Blanks
Wouldn't I also have to deduct the employer half of self employment taxes?
Posted on 1/23/23 at 11:06 am to GeauxTigers777
Not sure. I pay myself 62k a year. Max I can do in my SEP IRA is $15,600 a year.
Posted on 1/23/23 at 2:41 pm to GeauxTigers777
quote:
Say I make $40k a year on the side, is one option better than the other?
How much do you want to put in?
If you do a solo 401K, and you are maxing out your employee deduction at your regular job, you can't contribut as an employee to the solo 401(k). BUT you can contribute as an employer, either via a match, a safe harbor contribution, OR PROFIT SHARE.
A SEP, you are limited to 25% of your net self employment options.
So if you want to do more than that, do a solo 401(k) funded solely with profit sharing contributions.
You will want to talk to an expert to set this up, and the set up / annual maintencace of the solo 401(k) is more than the SEP... so you want to make sure you are conrributing enough in excess of the SEP amount to make it worthwhile.
Posted on 1/23/23 at 3:04 pm to LSUFanHouston
If your side gig ever grows to include employees, you are required to give them the same percentage contribution as you do for yourself which might factor into which one you prefer.
This post was edited on 1/23/23 at 3:05 pm
Posted on 1/23/23 at 3:07 pm to agilitydawg
quote:
If your side gig ever grows to include employees, you are required to give them the same percentage contribution as you do for yourself which might factor into which one you prefer.
Correct. But by design, a solo 401(k) is not for a company with employees.
Posted on 1/23/23 at 3:21 pm to GeauxTigers777
Most of your concerns have probablu been answered.
If your side gig is a sole prop/self employed, then pretty sure your max Contribution for either a sep ira or solo401k(employer, since you max out employee on your other job)is 20% net profit. (If you're set up as a scorp, w2 etc then it can change a little regarding the sep ira).
Sep ira have a little less maintenance and administrative issues than the solo 401k does(there's special forms that have to be filled out annually once the value reaches 250k). If you have any plans to do a backdoor Roth now or in the future than the sep ira will limit you in that regard. Additionally, as mentioned if you're planning to add employees in the future to this side gig, then easier to keep a sep ira where as with a solo401k you'd have to transition to an entirely new plan.
If your side gig is a sole prop/self employed, then pretty sure your max Contribution for either a sep ira or solo401k(employer, since you max out employee on your other job)is 20% net profit. (If you're set up as a scorp, w2 etc then it can change a little regarding the sep ira).
Sep ira have a little less maintenance and administrative issues than the solo 401k does(there's special forms that have to be filled out annually once the value reaches 250k). If you have any plans to do a backdoor Roth now or in the future than the sep ira will limit you in that regard. Additionally, as mentioned if you're planning to add employees in the future to this side gig, then easier to keep a sep ira where as with a solo401k you'd have to transition to an entirely new plan.
This post was edited on 1/23/23 at 3:26 pm
Posted on 1/23/23 at 5:20 pm to Puffoluffagus
I have zero chance of adding employees in this role as it is more of a consulting job. I will look deeper into the solo 401k. I currently do a back door Roth, so I don’t want to lose that flexibility. In terms of how much I’m willing to contribute, I am willing to contribute every penny im allowed (100% if allowed).
Did I see where the recent omnibus bill is doing away with the pro rata on the ira?
Did I see where the recent omnibus bill is doing away with the pro rata on the ira?
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