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SEP IRA Versus Solo 401(k)

Which is best for the owner-only business?


An employer can contribute the lesser of 25% of compensation or $58,000 for 2021 to a SEP IRA. A Solo 401(k) plan allows an owner-only business to contribute 25% of compensation plus an individualʼs salary deferral of $19,500, up to a maximum of $58,000 for 2021. Individuals age 50 or older may contribute an additional $6,500 in salary deferrals in the Solo 401(k) plan. The catch-up contribution does not count toward the overall contribution limit of $58,000.

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FEATURE SEP IRA SOLO 401(k)
Loan Availability No. Yes, up to the lesser of 50% of vested account balance or $50,000.
Plan Establishment Deadline Tax filing deadline, plus extensions. The end of the tax year for which the deduction is taken.
Maximum Eligibility Age 21 and worked for the employer in three of last five years. Age 21 and worked one year of service (two years if immediate vesting).
Distributions Available Yes. However, distributions prior to age 59½ may be subject to 10% penalty. Only if a qualifying event occurs (e.g., plan termination, death, disability). Distributions under age 59½ may be subject to 10% penalty.
Annual 5500 Filing No. Yes, unless the plan has less than $250,000. Must always be filed in final year.
Creditor Protection Protected up to $1 million in bankruptcy proceedings only; state laws vary. May be available if plan is deemed an ERISA plan or if plan meets eligibility under state spendthrift laws.

 

State and local tax laws may differ from federal tax laws. Stifel does not provide tax advice.
You should consult with your professional tax advisor regarding your particular situation.

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