What is the difference between SEP IRA and Individual 401(k)?

SEP IRA and Individual 401(k) plans are both retirement plans that self-employed individuals or small business owners can set up for themselves and their employees. Here are the key differences and pros and cons of each plan:

SEP IRA

A Simplified Employee Pension (SEP) IRA is a type of retirement plan that allows employers to contribute to their own and their employees’ retirement accounts. Here are some of the pros and cons of a SEP IRA:

Pros:

• Contributions are tax-deductible for the employer.
• Employees do not pay taxes on SEP IRA contributions until they withdraw the money at
  retirement.
• Easy to set up and maintain with low administrative costs.
• No annual filing requirements.
• Can be used in addition to another retirement plan, such as a 401(k) plan.

Cons:

• Only the employer can contribute to the plan.
• Contributions must be the same percentage of compensation for all employees.
• No catch-up contributions for employees age 50 or older.

Individual 401(k)

An Individual 401(k) plan, also known as a solo 401(k), is a retirement plan designed for selfemployed individuals or business owners with no employees other than themselves or their spouse. Here are some of the pros and cons of an Individual 401(k) plan:

Pros:

• Higher contribution limits than a SEP IRA, allowing for greater retirement savings.
• Both employer and employee contributions are tax-deductible.
• Allows for catch-up contributions for employees age 50 or older.
• Can be used in addition to another retirement plan, such as a SEP IRA.
• Flexibility in choosing investment options.

Cons:

• Higher administrative costs and more complex to set up and maintain.
• Annual filing requirements if the plan assets exceed a certain amount.
• Not suitable for businesses with employees other than the owner and their spouse.

In summary, SEP IRA and Individual 401(k) plans have different pros and cons, and the best plan for you will depend on your individual circumstances. A SEP IRA may be a better option for businesses with employees, while an Individual 401(k) may be better suited for self-employed individuals or business owners with no employees other than themselves or their spouse. It’s always a good idea to consult with an iWealth Financial Advisor to determine which plan is right for you.