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