Contributions and Contribution Limits

What advantages does a Self-Directed Solo 401(k) have over a SEP-IRA?

A Rocket Dollar Self-Directed Solo 401(k) allows for employee salary deferral contributions, company matching, Roth contributions, and profit-sharing. The SEP-IRA only allows for profit-sharing contributions.

What are the advantages of a Self-Directed Solo 401(k)?

  • Checkbook control for any investment
  • You can reach the maximum annual contribution limit quicker since the Self-Directed Solo 401(k) has both salary deferral and profit sharing. (A SEP only includes profit sharing)
  • $19,500 contribution limit for self-employed income deferrals. Individual employee salary deferrals are not allowed in SEP IRAs.
  • Catch-up contribution limits for those 50 and older are $6,500 allowing for a total of $26,000 self-employed income deferral
  • Employer contributions (company matching) of up to 25% of total salary compensation OR 20% of profit sharing, with an upper limit of $57,000 for 2020.
  • A designated Roth account option in a Solo 401(k), which is not available in the SEP-IRA

What if I have both a SEP and a Solo 401(k)?

You can have both accounts; however, in many situations, the Self-Directed Solo 401(k) has more benefits. Having both a SEP-IRA and a Self-Directed Solo 401(k) will not allow a business owner to defer more than $55,000 for 2018 and $59,000 in 2019.

Is there any time I should definitely go for a SEP-IRA?

If you have any number of full-time employees you will need to go for a SEP-IRA over a Solo 401(k). The SEP-IRA can be a great option for smaller workforces. If you are going to hire employees in the very near future, this can cause you to shut down contributing to a Solo 401(k). Be aware that you will have to give all employees company plan (employer) contributions equal to those of which you own. You can read more about the Self-Directed SEP-IRA here.

This applies to ALL eligible workers for the plan.

  • The employee is 21
  • The employee has worked for the employer for at least 3 out of the last 5 years
  • The employee has received at least $600 in compensation

This doesn't apply to

  • Employees covered by a union agreement
  • Employees who are non-resident aliens and don't collect US wages

Solo 401(k) Funding-3

 

Read more about our Self-Directed Solo 401(k)