For self-employed individuals, an individual 401 (k) account may offer higher annual contribution limits and greater tax deductions than an SEP IRA, depending on their income. Individual 401 (k) plans also allow you to make Roth contributions after taxes. In many ways, the 401 (k) plan for self-employed workers works the same way as a standard 401 (k). Participants make contributions with their pre-tax income and those savings can be invested in a variety of vehicles to increase deferred taxes until they retire in retirement.
With similar annual contribution limits, the individual 401 (k) IRA and the SEP may seem similar, but the 401 (k) may be the best option for single self-employed people. The SEP IRA doesn't allow for up-to-date contributions if you're over 50 and don't offer a Roth version, so if any of those options are a deciding factor, the SEP IRA won't be for you. The SEP IRA is easy to set up and is offered by many brokers, such as Schwab, Fidelity and Merrill Edge. That said, if you contribute to an SEP IRA for yourself, the IRS requires that you also contribute to each eligible employee's SEP IRA.
But before we dive into the nitty-gritty of SEP IRAs and how they compare to 401 (k) plans, let's discuss some of the basics of SEP. Both the individual 401 (k) and the SEP IRA allow you to save similar amounts of money each year, but these plans differ in a few key ways, and you'll want to read the small print to see which plan works best for your situation. On the contrary, the SEP IRA limits you to the rules of a traditional IRA, even if the maximum annual contribution is much higher than that of that individual plan. If your self-employment income is high, an SEP IRA is a convenient way to help you maximize your retirement contributions and minimize management.
If you run your own business and have a small number of employees, you may be interested in a simplified employee pension plan (SEP) or an SEP IRA. The individual 401 (k) plan and the SEP IRA are two of the best retirement plans available to a small business owner, even a self-employed self-employed person seeking to establish a plan of professional caliber. However, if there's one serious problem with the SEP IRA, it's that you should treat all members of the program the same way. Whether you set up an SEP IRA or a 401 (k), you'll open up an easy and affordable retirement plan that can help you save for your future.
In addition to having high contribution limits, an SEP IRA allows you to deduct all of your employer's contributions when calculating your business taxes. Otherwise, the SEP IRA must comply with the same rules on investments, distributions and reinvestments as a traditional IRA. If you're creating a plan for your employees, you'll also want to compare the SEP IRA with the SIMPLE IRA to see which one works best.