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Ep #028: Investing for Retirement as a Solopreneur: The SEP IRA vs Solo 401k Thumbnail

Ep #028: Investing for Retirement as a Solopreneur: The SEP IRA vs Solo 401k

As a business owner, saving for retirement can be a daunting task. Unlike employees of larger companies who often have access to employer-sponsored retirement plans, business owners are responsible for creating and funding their own retirement accounts. For the solo business owner that's where the SEP IRA and Solo 401k come into play.

In this podcast episode, we explore the pros and cons of each plan and provide insights into which plan may be best suited for your business. We delve into the challenges that solo business owners face in saving for retirement, provide guidance on how to navigate these obstacles, and discuss real-world examples of how each plan works in practice.



  • The pros and cons of the SEP IRA vs Solo 401k
  • Insights into which plan may be best suited for your business
  • The eligibility requirements and contribution limits to determine how much you can save
  • What maintenance looks like for the SEP IRA and Solo 401k



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"Hello welcome back to business exit success, we are diving into retirement plans today. Specifically, the SEP IRA and Solo 401k. When it comes to retirement planning and setting up a plan to save for your financial future, there are many types to choose from. I’m grouping the SEP IRA and Solo 401k together because they are a good fit for the business owner who has no employees. So this is for the solopreneur, this is for the husband/wife spouse scenario if you both work in your business. Now maybe you use independent contractors for 1099 work but for the most part, you do not have any W-2 employees."

What is the SEP IRA?

"Let’s first talk about the SEP IRA. This plan has been around for a long time, and it’s perhaps the easiest one to set up and start putting money away. They can be established at any time before you file a tax return. So if you have nothing set up right now and it’s Feb 2023, and you determine the SEP IRA would be a good fit for your business, you could set up a SEP IRA right now and make a prior year contribution for 2022 as long as it’s before the tax filing deadline, April 15th or before the filing extension deadline. And you’ll get a tax deduction. Now that isn’t advice to do it, I would suggest meeting with a CPA first and having them review your income to determine how much you can put in, but I literally did this with a client early in 2022. She’s a real estate agent, self-employed, no employees, had a great income year and maxed out a SEP. Just make sure you document and make a note that the contribution is for the prior year and you're good to go."

How much can I contribute to a SEP IRA?

"Now the amount that can be contributed to a SEP IRA is the lesser of 25% of your adjusted net earnings, or up to the cap of $66,000 for 2023. This number gets adjusted for inflation every year. For 2022 it was $61,000. The calculation can get messy so again speak with a CPA first but depending on your income, you can put away a decent amount of money in these plans."

"Now some key differences I will mention with the SEP. There are no employee contributions, so the money that goes into the SEP is all considered employer contributions. There are no catch-up contributions. A catch-up contribution is extra money you can put into a plan if you are over the age of 50. This doesn’t exist with the SEP. There are also no Roth contributions and there are no loan provisions. So you can’t borrow against the SEP IRA like you can in a 401k."

How to exclude employees from the SEP IRA and why to consider doing it

"You can also exclude certain employees with a SEP IRA. You can exclude part-time workers, those under the age of 21, and those who have not worked for you at your business in at least three of the previous five years. This is important to understand with the SEP because if you have an employee who does qualify, you will be required to contribute a proportional amount to your employee's salary/wages. So as an example, if you contributed 20% of your earnings into your SEP, you as the ER would be required to contribute 20% of your employee's earnings into a SEP. Now not many business owners want to do this, hence why the SEP IRA is most popular for those owners who have no employees. Because once you contribute that money to your employee's SEP, it’s their money. There’s no vesting period, they can essentially leave the next day once the money hits their account and you can’t do anything about it."

How much can I contribute to a solo 401k?

"Now with an individual 401k, you can make employer contributions like the SEP but also you can make employee deferrals. So, if you are an individual solo business, you are essentially the Employer and also the employee. So as the employee of your business, you can put in up to $22,500 in 2023 plus an additional 7,500 if you are over the age of 50. So you can technically put in 30,000.  And then as the employer, you can put in an additional 25% of your earnings on top of your 22,500 or 30,000. So if you are an independent business owner, making good money, you have low overhead, and you want to aggressively save some money, the individual 401k can be very attractive."

"Let’s look at an example, you are self-employed, have no employees, you have 100,000 in earnings, 22,500 would be your EE deferral into the 401k and then 25% of your 100,000 in earnings so 25,000 would be your ER contribution for a total of 47,500 going into your solo 401k. Now, this is if you wanted to max it out, which not everybody wants to or can do, but if you are starting a business later in life and you want to aggressively put money away if you have the earnings, you can certainly do it."

"Now let’s talk about the maintenance of the plans, so what regulatory rules do you need to follow, is there any administrative burden to either the SEP or Individual 401k. And honestly, for both of them, it’s not bad at all."

"For the SEP IRA, the annual maintenance is very low, next to nothing."

"For the 401k there are some maintenance and reporting requirements when there is greater than $250,000 of assets in the plan. A single form needs to be filed called the 5500-EZ form, and this is just an informational return that is filed with the IRS. Any solo 401k plan that has less than $250,000 in plan assets has no filing requirements at all."

When can I establish a SEP IRA vs a Solo 401k?

"For the SEP IRA, I mentioned briefly at the beginning you can open a SEP as long as it’s before the tax filing deadline including extensions.

"The Individual 401k needs to be open before year-end and if you wanted to make an EE contribution it would need to be made before year-end as well, but you can make prior year contributions for the employer portion."

"For both the SEP IRA and solo 401k, any money that is put into these plans can be invested, it grows tax-deferred and you can use your deferrals and contributions to offset your income for the tax year. So it’s a really easy way to save on taxes."


"In the show notes, I will include several links that get into the specifics for each of these plans. If you have any questions don’t hesitate to reach out, we work with business owners all day every day. Setting up a retirement plan for yourself is essential to saving and investing for your financial future. Also, stay tuned for those of you who have employees in your business, we will be digging into other retirement plans that work well in those scenarios in upcoming episodes."