What is a Solo 401(K) Plan?

What is a Solo 401(K) Plan?

by | Oct 19, 2020


Hi there and thank you for stopping by today. Today I’m going to talk about part two of a two part series on Sep IRAs versus Solo 401k plans. I spoke about Sep IRAs in the previous video, session one. Today session two, I’m going to talk about Solo 401Ks.

My name is Tina Anders. I am the Fee Only Certified Financial Planner for my firm located here in Petaluma, California, Anders Wealth Management. I serve primarily Sonoma and Marin counties here in California.

A Solo 401k plan is limited to business owners and a spouse who is also involved in the business. A solo 401k plan offers the opportunity to make both employee contributions and employer profit sharing contributions. The employee contributions are limited to the same as for regular employer sponsored retirement plans: $19,500 in 2020, with an additional $6,500 catch up contributions for those who are 50 years or older.

Additionally, employer profit sharing contributions can be made up to 25% of the employee compensation with a combined maximum employee and employer contributions of $57,000 and $63,500 for those 50 or over. And those numbers are for the year 2020. You’ll have until your tax filing date, including extensions to make your actual employee contributions and employer profit sharing contributions.

Unlike a SEP IRA, a Solo 401k can offer a Roth option, that’s after tax contributions, for the employee only contributions. All profit sharing contributions must be made to a traditional non Roth 401k plan. Additionally, loans can be taken for the plan if allowed in the plan document?

Which plan is better for you? Would it be a solo 401k plan? Or would it be a SEP IRA? A SEP IRA is easy to set up, requires virtually no administrative work. The ability to establish and to fund the account right up until your tax filing date offers a high degree of flexibility for you.

With income that varies from year to year you might be better off contributing to a solo 401k. Since the amount that can be contributed to the SEP is totally dependent on your earnings. The amount you can contribute will be limited in years where your income wanes a bit as long as you earn at least $19,500. If you’re under the age of 50, or $26,000, if you’re 50 or older, you can contribute those amounts under the employee contribution component of your 401k.

If you want to be able to make Roth contributions, or you want to be able to take a loan out from your plan, a solo 401k is the better option because you don’t have either option with a SEP IRA. In general if you’re self employed, and you don’t have any employees, and you consistently want to be able to maximize your retirement contributions, a Solo 401k will probably be the best option for you.

Thank you for stopping by. If you have any comments, questions, topics on what you would like me to do a video please comment below and I will respond. Tina Anders, Anders wealth management in your corner. Thank you again.

What is a SEP IRA?

What is a SEP IRA?

by | Oct 12, 2020


Hi there and thank you for stopping by today. Today I’m going to speak to you about SEP IRAs and solo 401(k) retirement plans. It’s going to be a two video session. First I’m going to talk to you about SEP IRAs.

My name is Tina Anders. I am the Fee Only Certified Financial Planner for my firm located here in Petaluma, California, Anders wealth management. I serve primarily Sonoma and Marin counties here in California.

Again, thanks for stopping by. So, I’m going to talk about starting with SEP IRAs, Simplified Employee Pensions. Simplified Employee Pensions or SEP plans are easy to establish, and they’re good for business owners with relatively high contribution levels, depending on your income level.

All contributions made to SEP IRAs are employer contributions. Unlike a 401(k) plan, there are no employee contributions. Contributions can be made for up to 25% of your compensation up to a limit of $57,000 for 2020.

For some sole proprietors, that actual contribution rate might be limited 20% of their compensation due to the way in which self employment income flows through the calculation.

A SEP IRA can be established up until the point you file your taxes including an extension. Also, a SEP account holder, generally speaking, can invest in anything that an IRA traditional or Roth can be invested in at your custodian.

A SEP IRA can be opened by a sole proprietor, corporation, including S or C, partnerships and other types of small business entities. Contributions to a SEP on behalf of the owner or the employee are immediately vested. And a couple more things, there’s no Roth option for a SEP IRA like there is for a solo 401(k) which we’ll get to in our next video.

And also loans are not available up against your SEP IRA as they are in solo 401(k)’s which we’ll talk about in the next video. And I’m also going to talk to you about which plan seems to be better for most people, a SEP IRA or a solo 401(k) plan?

Again, thank you for stopping by today. Tina Anders Anders wealth management in your corner always.