A SEP IRA is a great retirement savings plan for self-employed people and small businesses with few employees. It allows individuals to contribute up to 25 percent of their business earnings or compensation, up to a maximum of $66,000 in 2023. On the other hand, a Solo 401(k) also known as an Individual 401(k), allows small business owners and the self-employed to save up to $69,000 annually for retirement.
Solo 401(k) and SEP IRAs are both popular retirement savings options for self-employed individuals and small business owners. However, they have some key differences that individuals should consider when choosing the right plan for their needs. Solo 401(k) plans offer additional features that may make them a better option for solo practitioners, such as the ability to take out loans and make Roth contributions.
A Roth IRA is a smart idea for individuals who expect to be in a higher tax bracket in their later years. Roth IRAs allow for tax-free withdrawals in retirement, making them an attractive option for those looking to minimize their tax burden in the future. In comparison, SEP IRAs and Solo 401(k) plans offer tax-deferred growth on contributions, meaning taxes are paid upon withdrawal in retirement.
The IRS's new fact sheet provides guidance on provisions related to de minimis financial incentives, Roth SIMPLE and SEP IRAs, and designated Roth contributions. These guidelines can help individuals better understand the rules and regulations surrounding these retirement savings plans and make informed decisions about their financial future.
The SECURE 2.0 Act has expanded the existing tax credit for small employers with 50 or fewer eligible employees, making it easier for businesses to start and maintain retirement plans such as SEP IRAs and Solo 401(k)s. This tax credit can help offset the costs associated with setting up and administering these plans, making it more affordable for small businesses to offer retirement benefits to their employees.
In a recent announcement, Ascensus revealed a definitive agreement to acquire Vanguard's Individual 401(k) and Multiple Participant SEP plans. This acquisition could have implications for individuals who currently have accounts with Vanguard and may lead to changes in the way these retirement plans are managed and serviced in the future.
Overall, understanding the differences between SEP IRAs and Solo 401(k) plans is essential for individuals looking to save for retirement. Each plan has its own unique features and benefits, so it's important to carefully consider your individual financial goals and circumstances before choosing the right option for you. Whether you're self-employed or a small business owner, there are retirement savings options available to help you secure a comfortable future.
