www.solo401k.com Secrets

Is a solo 401( k) much better than a SEP IRA?

I like SEP IRAs and also have recommended them to particular clients. Like the solo 401( k), you can contribute up to $52,000 right into a SEP Individual Retirement Account per year, but your revenue needs to be substantially greater to obtain to that level of financing.

Jill is a real estate agent with no staff members as well as her business is structured as a single proprietorship. Her company earnings, or web Schedule C, in 2015 was $130,000. She is over 50 and also does not have adequate saved for retirement. Her other half also makes an excellent living as well as their youngest youngster just recently finished college and also they currently have substantial optional income to catch up on their retirement cost savings. If Jill were to open a SEP Individual Retirement Account to save via her business, the Internal Revenue Service would make her usage the following computation:

( Internet schedule C - 1/2 of self-employment tax obligation) x 20% =

In Jill's case, that would be ($130,000 -$8,790.20) x. 2 = $24,241.96. If Jill were to open up a solo 401(k), she could add $17,500 for herself plus the $24,241.96 for profit sharing (exact same quantity as SEP above) as well as include the $6,500 catch up arrangement due to the fact that she is over 50. That is an overall of $48,241.96 in the Solo 401(k) and only $24,241.96 for a distinction of over $24,000! Please note the catch up is above as well as past the $52,000 limit. SEP IRAs do not enable over 50 catch ups.

For a person around that income level, the solo 401(k) can actually help delay even more loan. Solo 401(k)s also enable proprietors to open a Roth 401(k). At this time, there is no Roth SEP. You are required to file a type 5500 EZ each year as soon as you have a balance of over $250,000 in your Solo 401(k).

What entities can set up a solo 401(k)?

Sole proprietorships, Partnerships, companies, and also llcs can ready up solo 401(k)s. If your business is a company, you need to pay on your own W2 incomes to be able to add to a solo 401(k). The earnings sharing payment can just be based upon your W2 incomes. If Jill decided to incorporate and paid herself a W2 income of $70,000 as well as took the staying $60,000 of earnings as a returns, she might still conserve $24,000 ($17,500 + $6,500 catch up) as an employee, but her profit sharing would be limited to $17,500 ($70,000 x. 25). That is less than what she could contribute in our sole proprietorship example, however still $24,000 more than what she might contribute to a SEP if she paid as well as was a company W2 salaries of $70,000.

When must I develop a solo 401(k) strategy?

The strategy papers need to be signed by 12/31. In some cases, I don't meet individuals till the year mores than as well as it is too late to establish a solo 401(k) plan. In this instance, it is feasible to establish a SEP IRA right before the tax filing target date. Company plans are flexible and it is important to remember that you can terminate your strategy as well as select a different plan in the future. Both the SEP and also solo 401(k) permit you to make big contributions when you have the profits in one year and also do not require contributions if you have lean years.

Exactly how do I determine my self-employment tax obligation?

The most convenient method is to fill out Set up SE with your 1040 or use a self-employment tax calculator.

What else should I recognize?

Solo 401(k)s are created for companies where there is only one individual operating in www.solo401k.com the business. You can establish one up, however you will likely need to end the plan when you employ your very first employee. Then, you might consider either a normal 401(k) plan, SEP Individual Retirement Account, or BASIC IRA for your organisation. A few of the rules connected to solo 401(k) plans can be intricate. It is suggested that you consult Internal Revenue Service Publication 569 and also your tax expert before proceeding.


Like the solo 401( k), you can contribute up to $52,000 right into a SEP IRA per year, however your income needs to be substantially greater to get to that level of financing. If Jill were to open a solo 401(k), she can contribute $17,500 for herself plus the $24,241.96 for earnings sharing (same quantity as SEP above) as well as add the $6,500 catch up arrangement because she is over 50. Solo 401(k)s likewise permit owners to open up a Roth 401(k). Both the SEP and solo 401(k) permit you to make large payments when you have the profits in one year as well as do not call for contributions if you have lean years.

Solo 401(k)s are created for businesses where there is just one individual working in the business.