By: Tim Hayes Financial Advisor - posted in: Financial & Retirement Planning - Last updated Jan 15, 2019

Self-Employed Retirement Plans: SEPs & SOLO 401(k)s

by | Last updated Jan 15, 2019 | Financial & Retirement Planning

Being self-employed involves a lot of things one being it can be risky. But it need not be without enough retirement saving options.I would like to give some love to two under-appreciated retirement plans, the Simplified Employee Pension or SEP and the solo 401(k). Both are available for any person that generates income from self-employment.

SEPs are supercharged IRAs, following the same rules but allowing for higher contributions.

More about SelfEmployed Retirement Plans

In 2018, a self-employed person can contribute the lesser of 20% of their net adjusted income or $55,000. Net adjusted income is gross income from self-employment minus expenses and half of your self-employment tax.

SEPs are easy to setup and administer. You can download form 5305-SEP from the IRS’s website or you can get it from your financial advisor. You do not even have to send the form back to the IRS. Just file it in your records. Most mutual fund companies, brokerage houses, or insurance companies offer prototype SEPs. You can invest your SEP in stocks, bonds, funds, CDs, etc.

You can also make contributions up until you file your taxes including extensions. So, someone eligible for an extension could open a SEP for 2018 when they file their taxes in October of 2018.

SEPS are flexible, you change tome amount you invest from year to year and there can be years when you decide not to fund it all.

Individual 401(k) Plans for Self-Employed

Contributions are 100% tax-deductible; they grow tax deferred; however, they are taken above the line and are not Schedule C deduction. Meaning you save on income taxes but not self-employment taxes.

Any self-employed person that wants to save more than 20% should look into the solo 401(k). It allows them to put in the 20% plus an additional $18,500 of employee contribution. Moreover, if they happen to be age fifty or over, they can add another $6,000. And if your spouse draws a salary, they can also contribute.

For example, someone age fifty with net adjusted income of  $100,000 could contribute $20,000 to a SEP. However, if they did a solo 401(k), they could do the $20,000 plus the $18,500 of employee contribution plus another $6,000 in age fifty catch-up, for a total of $44,500.

There is a limit, though. In 2018 that number is $55,000. However, catch-ups do not apply, so people fifty or over with enough income can do $61,000. One thing to keep in mind, the $55,000 number is per employer while the employee limit is per person. So if you have more than one job where you contribute to a retirement plan the most you can do in total is 18,500.

You can add a Roth component to a solo 401(k) that way some or all of the employee portion ($18,500) could go into a Roth account. Setting up a solo 401(k) does require a little more in paperwork than a SEP. And once the assets in the plan reach $250,000, every year you have to file form 5500 EZ with the government. But form 5500 EZ is only a two page form.

The deadline for establishing a Solo 401k is December 31st of the year in which you would like to receive the tax deduction, but you can fund the employer portion (the 20% or less) up until you file your taxes including any extensions.

Another advantage of the Solo 401k is the ability to access money tax-free using a Solo 401k loan. You can borrow 50% of the total 401k value up to a $50,000 maximum. IRS rules do not allow loans with an SEP IRA.


Independent Contractor, Sole Proprietor, LLC Taxes, Mike Piper CPA, Kindle Addition

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