SEP IRA vs Solo-401K know the basics.

Self-employed Solo 401K vs. Sep IRA basics

If you have self-employment income, there are a variety of ways to save some taxes to grow your retirement account annually. Here are two retirement plans that are most commonly available:

SEP-IRA: Allow tax deductible contributions and tax-deferred growth. Easy to set up with most administrators and very little paper work. The max contribution for this plan is up to 25% of compensation with a cap of $44,000 as of 2006. Account does not allow account holder to borrow against the account.

Solo 401K: Similar tax advantages as SEP-IRA, but with more paperwork, a more limited number of administrators, and higher contribution limits. This account allows profit sharing contributions of up to 25% of compensation plus tax-deductible salary deferrals to the plan of up to $15,000 as of 2006. The cap is the same at $44,000. Business owner at min of 50 years old can take advantage of a catch-up provision that allows an additional $5,000 contribution. Couples can contribute up to $98,000, the contribution to your Solo 401K are based on self-employment income, not on income earned. While most retirement plans provide a tax break and help you save for the future, the Solo 401K by far offers additional benefits. Another benefit this account provides is the ability to borrow against it over max of 5 years and up to $50,000 or 50% of the account value, penalty free.

So, while the caps are the same, you can make very little self-employed income and basically defer it all, which you can’t do with Sep-IRA. This gives you that added flexibility which is especially beneficial for those who have some self-employed income as secondary income and want to get the most tax advantages. For example, if you made $15,000 for the year, you can contribute all of it into a Solo 401K, while only $3,750 (25%) with a SEP-IRA.

However, if your self-employed income is substantially higher and is your sole source of income, then 25% contribution may be plenty and maybe a SEP-IRA account would work best to keep things simple and the account cost down.

Please feel free to email me at wlam@adelphiretirement.com, or visit our website at www.AdelphiRetirement.com. My contact number is 510-286-7988 etx.2.

Sincerely,

Wai-Yew "Andrew" Lam, President

Adelphi Retirement Management, Inc.