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304 North Cardinal St.
Dorchester Center, MA 02124
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Business owners and solo entrepreneurs have the unique opportunity to choose their own retirement savings plans, potentially enjoying tax benefits in the process. Two popular options are the Simplified Employee Pension (SEP) IRA and the Solo 401(k). Both can help you save for retirement, but the best choice depends on your business structure and investment preferences.
A SEP IRA is a retirement plan that can be established by any employer, including self-employed individuals. Authorized by Congress in 1978, SEP IRAs have been around longer than Solo 401(k)s. Setting up a SEP IRA is straightforward. Once you select a provider, such as a bank, credit union, or investment brokerage, you’ll be guided through an easy setup process.
Your investment options may be somewhat limited to traditional choices like stocks or mutual funds. For 2023, self-employed individuals can contribute up to 25% of their net compensation or $66,000, whichever is less. SEP IRAs can now be offered as Roth IRAs, where taxes are paid on current income, as well as traditional, tax-deferred contributions.
SEP IRAs do not offer catch-up contributions for those over 50, as they are fully funded by the employer. If your business grows and you hire employees, your SEP IRA can cover them, provided your guidelines are no stricter than those set by the IRS. However, you must contribute the same percentage of compensation to employee accounts as you do to your own.
A Solo 401(k) is similar to a 401(k) plan offered by businesses but is designed for one-person businesses or one person and a spouse. Created as part of the Economic Growth and Tax Reconciliation Relief Act of 2001, Solo 401(k)s can be either traditional (tax-deferred) or Roth.
To qualify for a Solo 401(k), you must have self-employment activity and no employees other than a spouse. Contributions can be made as both the employer and employee, up to a maximum of $66,000 for 2023. Additionally, if you are at least 50 years old, you may be eligible for a catch-up contribution. Note that overall maximums apply to individuals, not accounts, if you also contribute to a 401(k) through a W-2 employer.
Many financial experts recommend a Solo 401(k) because it may allow you to shelter more income from taxes and offers the option to borrow from the plan. However, its administrative costs and tax reporting requirements can be higher than those for a SEP IRA. Additionally, if your business grows, a Solo 401(k) is no longer an option.
Self-employed individuals are responsible for their own retirement savings. There are tax-advantaged ways to save, and it’s important to choose the right plan for your situation. Consulting a financial planner can help you determine the best retirement savings vehicle for your needs. Regardless of your choice, developing the habit of saving is crucial for your financial health.
For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.
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