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SEP IRA Vs. Solo 401k
Old 08-12-2013, 11:14 AM   #1
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SEP IRA Vs. Solo 401k

I'm trying to decide between a SEP IRA and a Solo 401k. From what I understand, contribution limits for the SEP is either 25% of compensation or $51k, whichever is less. As far as the Solo 401k goes, I know I can contribute up to $17,500 as an employee and $17,500 as an employer. Also, both are deductible as a business expense.

I'm wondering if anybody has experience with one or both types of plans. I haven't looked into the fees for a solo 401k but it seems like they'd be higher than a SEP. Also, once the account tops $250,000 I've heard there additional government reporting is required for the solo 401k. I'm not completely sure what the additional reporting would consist of.

Additionally, I'm not sure if I'm missing anything or have overlooked any advantages/disadvantages of either plan.
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Old 08-12-2013, 12:47 PM   #2
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I have a solo 401K. It allowed me to defer more than I could with a SEP, because every dollar of the first $17K ($23K if over 50 years old) can go into the 401K. That's the "employee contribution." In addition to that, you can make the "employer contribution", which is 25% of compensation. With the SEP, you are limited to the employer contribution, which is limited to 25% of total pay. Total amount that can be deferred under either plan for 2013 is $51,000.

Here's a good comparison of the options, from Fidelity.

Yes, when you have over $250K in the Solo 401K account you have to file a Form 5500 with the IRS. It is a piece of cake--it takes about 10 minutes to complete. Just be sure to get an Employer ID Number (EIN) from the IRS (another easy process) at some point before you need to fill out the form.

There's no fee at Fidelity for the Solo 401K. Vanguard offers them, too, now, I don't know if they charge a fee.
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Old 08-12-2013, 01:35 PM   #3
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+1 to samclem

I have an individual 401k and an individual Roth 401k at E*TRADE with no account fee. They were the only one with the Roth option at the time. I'm not anywhere near $250k. I'll probably roll over into a Fidelity IRA when I don't need them anymore. You can put just about your first $30k into the 401k with the 25% employer contribution, so I was able to work a little part time without affecting our taxes.
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Old 08-12-2013, 01:47 PM   #4
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Another +1 to samclem. DW's 401k through Fido has been very easy to administer and completely free of fees.
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Old 08-12-2013, 01:57 PM   #5
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The $250k reporting amount is per account. If you don't want to bother with the form, open a new account at another broker. Fidelity is no-fee, as mentioned, and Vanguard charges their usual low-balance fee ($20 per fund if the balance is below $50,000).

The "employer" contribution % is different for self-employed workers (e.g., not running through a corporation).

http://www.irs.gov/Retirement-Plans/...1%28k%29-Plans

Quote:
Employer nonelective contributions up to
  • 25% of compensation as defined by the plan, or
  • for self-employed individuals, see discussion below
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Old 08-12-2013, 02:16 PM   #6
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I have a SEP IRA which I opted for over a solo 401k for a couple of reasons.

The SEP was very easy to set up compared to the solo 401k IMHO. Also, I was already maxing out a 401k through my prior company at the time I set up the SEP. Was told that if I maxed on the company 401k I couldn't contribute anything to the solo 401k. Not sure that was right but the SEP has been fine for me.
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Old 08-12-2013, 10:28 PM   #7
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I picked the solo 401k so that I could continue to do a back-door Roth every year.
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Old 08-12-2013, 10:36 PM   #8
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Quote:
Originally Posted by RockyMtn View Post
I have a SEP IRA which I opted for over a solo 401k for a couple of reasons.

The SEP was very easy to set up compared to the solo 401k IMHO. Also, I was already maxing out a 401k through my prior company at the time I set up the SEP. Was told that if I maxed on the company 401k I couldn't contribute anything to the solo 401k. Not sure that was right but the SEP has been fine for me.
+1

My main reason is that I have a 'part-time' job at my (former full-time) employer where I'm a W2 employee.
My 3/4-time job (about 30+ hrs/week) is as an independent contractor, where I use my SEP.

Since I max out my 401k with my part-time job, I can only do the same 25% into a SEP IRA at my independent contractor gig as I would with a solo 401(k). If I really wanted to get obsessive, I would just do it all with my IC gig in a solo 401(k) so I could pick all of my investments, instead of 17k a year into the part-time employers craptastic 401k selections.

However, I've only been doing this part-time/3/4 time gig set-up for about 9 months, and wasn't sure how long it would last. Now that things are going somewhat smoothly, I might re-evaluate it and do a solo 401k next year if I think things will continue like they are for a few years to make the solo 401k hassle worthwhile.

Otherwise, I don't anticipate staying with my part-time gig for too much longer, at which point I can roll over my 401k into whatever investments I want.
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Old 08-12-2013, 11:46 PM   #9
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Hi - This is a great question. While I was working, and had an employer 401k, the SEP-IRA made more sense, as others have mentioned. This would probably apply to anyone if they like their employer's 401k options. If you leave your job, the solo 401k starts to make more sense (assuming you want to max things out). Also, you're numbers are a little off: the "employee" is limited to 17,500. The employer (profit sharing) portion is capped at 51,000 (including the employee portion, so $33,500 if the employee is maxing things out).

I'm going to open a solo 401k this year - so I don't have any first-hand experience for you. I have experience with the SEP-IRA, and I find that there is one nuisance. Contributions must be reported in the year they are received. BUT, if you want to max out your contributions, you cannot calculate that until the subsequent year. As a result, I've experienced some accounting headaches trying to keep track of which year's contributions apply to which year. As a result of this, I accidentally over-contributed. Due to the nature of the SEP-IRA, it's possible to "recharactarize" a contribution from before-tax to after-tax (and still leave the money in the IRA). This was the least painful way to do it because I caught the mistake before tax day.

FWIW, I plan to rollover the SEP-IRA into a rollover IRA. Put the "overcontribution" part into a ROTH, and get rid of the headache (you're required to keep track of the overcontribution for years to come). This will hopefully end that annoying paperwork issue. Moving forward, I am optimistic that the solo 401k will be easier to manage until that $250K point is reached. By then, though, the limit may be higher.
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Old 08-13-2013, 12:32 AM   #10
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I still wonder what's the status of separation of the service @55 for solo 401k.
If IRS would give green light, it it would be another advantage over SEP-IRA - if you closed the business @55 y.o. you could avoid 10% tax penalty.
See discussion here: Solo 401(k) - Withdrawals at 55 and here: Fairmark Forum :: Retirement Savings and Benefits :: solo 401K qualify for early exception at age 55?
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Old 08-13-2013, 10:01 AM   #11
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+1 for solo 401(K). No fees at Vanguard where mine is. Also, with solo 401(K), if spouse contributes significantly to the business, he/she can also do the $17.5K+20-25% of net business income. So if you have high business income and a spouse who can contribute to the biz, you can get around $90K pre-tax put away.
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Old 08-13-2013, 10:31 AM   #12
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I still wonder what's the status of separation of the service @55 for solo 401k.
I don't have the answer, but I would like to see it. My tentative plan is to stop contributing when I'm 55 and consider the business dissolved, and myself thereby separated from it. Then I'll start taking the distributions.
If this is prohibited because Age 55 separations/distributions aren't in my present Plan Document with Fidelity, I'll either amend that document or transfer the account to another place with the proper wording.
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Old 08-13-2013, 12:04 PM   #13
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I am planning the same.

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Originally Posted by samclem View Post
I don't have the answer, but I would like to see it. My tentative plan is to stop contributing when I'm 55 and consider the business dissolved, and myself thereby separated from it. Then I'll start taking the distributions.
If this is prohibited because Age 55 separations/distributions aren't in my present Plan Document with Fidelity, I'll either amend that document or transfer the account to another place with the proper wording.
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Old 08-13-2013, 07:19 PM   #14
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Anyone ever use a Solo 401K/ or Roth IRA to purchase promissory notes?
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Old 08-16-2013, 12:35 PM   #15
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Thank you for all the great advice. I'm going to be establishing a solo 401k through Fidelity.

I have one last question. I organized my business as a sole member LLC and also established an EIN, which I later found out I didn't need to do. While discussing the options with Fidelity, they mentioned I need to either be a corp. or sole proprietor. I assume that since I didn't incorporate my default selection would have to be sole proprietor. Can somebody please verify my interpretation?
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