When you work for yourself, there is no HR department setting up a retirement plan and no employer match waiting for you. That freedom is part of why you started the business, but it also means building wealth for later is entirely on you. Two of the most popular options for self-employed people are the SEP IRA and the Solo 401(k). Both let business owners put money aside for retirement with tax advantages, but they work differently. Here is how to compare them as an Atlanta business owner.
Flex Fuel is not a tax advisor or investment advisor, and nothing here is tax, legal or investment advice. Contribution limits and rules are set by the IRS and change over time, so confirm the details with a CPA or financial professional before you open a plan.
Why a retirement plan belongs in your wealth plan
Once your business is turning a profit, the question becomes what to do with it. Paying down high-interest debt and building an emergency fund usually come first. Our guides on what to do with business profits and building an emergency fund while fixing your credit cover that order. After that, a retirement plan can be one of the most tax-efficient ways to turn today's profits into long-term wealth.
What is a SEP IRA?
A Simplified Employee Pension, or SEP IRA, is a retirement plan funded by the business. You, as the employer, make the contributions. It is known for being simple to set up and maintain.
How SEP IRA contributions work
- Contributions are made by the employer, generally as a percentage of compensation, up to annual IRS limits.
- You can usually choose how much to contribute each year, including nothing in a slow year.
- Contributions can often be made up to your business's tax filing deadline, including extensions.
The catch if you have employees
If you have eligible employees, you generally must contribute the same percentage of pay for them that you contribute for yourself. That can make a SEP more expensive as your team grows.
What is a Solo 401(k)?
A Solo 401(k), also called a one-participant 401(k), is designed for a business owner with no employees other than a spouse. The IRS describes it on its one-participant 401(k) plans page.
How Solo 401(k) contributions work
With a Solo 401(k), you can contribute in two roles:
- As the employee, through elective deferrals from your pay
- As the employer, through a profit-sharing contribution from the business
Because you can contribute in both roles, a Solo 401(k) may allow higher total contributions than a SEP at some income levels, within IRS limits. Your CPA can run the numbers for your situation.
Roth and loan options
Many Solo 401(k) plans allow Roth contributions, which are made after tax and can grow tax-free if the rules are met. Some plans also allow loans from the account. Features depend on the provider, so compare plan documents carefully. If you already have a personal Roth IRA, our guide to starting a Roth IRA while fixing your credit explains how it fits.
More paperwork
A Solo 401(k) usually takes more setup and record-keeping than a SEP. Once plan assets grow past an IRS threshold, an annual filing is generally required. Plan deadlines for setting up the plan and making elective deferrals can also be different from SEP deadlines.
SEP IRA vs. Solo 401(k): side by side
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Who it fits | Self-employed people and small businesses, including those with employees | Owners with no employees other than a spouse |
| Who contributes | Employer only | Owner as employee and as employer |
| Roth option | Depends on provider | Often available |
| Loans | No | Sometimes, depending on plan |
| Paperwork | Simple | More involved |
| Employees | Must generally be included at the same percentage | Plan generally no longer fits once you hire eligible employees |
How to choose the right plan
Choose a SEP IRA if:
- You want the simplest setup with very little administration.
- Your income varies and you want flexibility year to year.
- You have, or soon expect to have, employees and want a plan that can include them.
Consider a Solo 401(k) if:
- You have no employees other than a spouse.
- You want the option to contribute in both roles, potentially saving more.
- You want Roth contributions or a loan feature.
- You are comfortable with a bit more paperwork.
Other options to know about
The IRS outlines additional choices, such as SIMPLE IRAs, on its retirement plans for self-employed people page. Its SEP plan page covers SEP rules in detail.
Getting started
- Clean up your books. You need accurate net earnings to know how much you can contribute. Keeping business and personal money apart, as covered in our guide to separating business and personal finances, makes this easier.
- Talk to a CPA. Ask which plan fits your entity type, income and hiring plans.
- Compare providers. Look at fees, investment choices, Roth availability and customer support.
- Automate contributions. Setting aside a share of profits each month can keep you from scrambling at tax time.
- Protect what you build. Retirement savings are one part of a bigger plan that may also include life insurance and estate planning. See our guides on term vs. whole life insurance and building generational wealth in Atlanta.
Where credit fits in
Strong personal and business credit gives you options, such as better financing terms, that can free up more of your profits to invest. Check your three-bureau credit reports through SmartCredit at smartcredit.com/flexfuel so you know where you stand.
How Flex Fuel helps
Flex Fuel helps Atlanta business owners build the credit and financial foundation that wealth grows on. We review your personal and business credit, help you get organized for funding and point you toward the right professionals for tax and investment decisions. Explore our services and see how our guarantee works.
Ready to turn profits into wealth? Book a complimentary strategy session. We will review your credit and financial foundation with you and help you plan your next steps.
Book a Consultation ›Frequently asked questions
Can I have both a SEP IRA and a Solo 401(k)?
It is possible in some situations, but combined contributions are subject to IRS limits and rules. Ask a CPA before opening both.
Can an LLC owner open a Solo 401(k)?
Many single-member LLC owners and other self-employed people can, as long as there are no employees other than a spouse. Your CPA can confirm eligibility for your business.
What happens to my Solo 401(k) if I hire employees?
The plan generally no longer fits once you have eligible employees. You would typically need to move to a plan that covers them, such as a standard 401(k), SEP or SIMPLE IRA.
Is a SEP IRA or Solo 401(k) better for a side business?
It depends on your income, whether you also have a workplace plan and how much you want to save. A CPA can compare both for your situation.
