Yes, it’s possible to have both a solo 401(k) and a SEP IRA. A solo 401(k) is a retirement savings plan for self-employed individuals or small business owners with no full-time employees. A SEP IRA is another retirement savings plan that is available to self-employed individuals and small business owners. Both plans offer tax advantages, and they can be used to supplement each other. With a solo 401(k), you can contribute more money than with a SEP IRA, but there are more rules and regulations governing solo 401(k)s. With a SEP IRA, you can make catch-up contributions if you are age 50 or older, but you cannot borrow money from a SEP IRA.
Solo 401k Contribution Limits
A solo 401k is a retirement savings plan designed for self-employed individuals. It offers higher contribution limits than a SEP IRA, but there are also some restrictions to consider. For 2023, the solo 401k contribution limits are as follows:
- Employee elective deferrals: $22,500
- Employer profit-sharing contributions: 25% of net self-employment income, up to a maximum of $66,000
- Catch-up contributions (for individuals age 50 and older): $7,500
| Contribution Type | 2023 Limit |
|---|---|
| Employee elective deferrals | $22,500 |
| Employer profit-sharing contributions | 25% of net self-employment income (max. $66,000) |
| Catch-up contributions (age 50+) | $7,500 |
SEP IRA Contribution Limits
The contribution limits for SEP IRAs are lower than those for solo 401(k) plans. For 2023, the limits are:
- Up to 25% of your net self-employment income, or
- $66,000 (or $73,500 if you are age 50 or older by the end of the year).
Unlike solo 401(k) plans, there is no catch-up contribution limit for SEP IRAs.
Table Comparison
| Contribution Limits | Solo 401(k) | SEP IRA |
|---|---|---|
| Regular Contributions | Up to 100% of your earned income (max $66,000), plus $7,500 ($10,500 if you are age 50 or older by the end of the year) | Up to 25% of your net self-employment income, or $66,000 ($73,500 if you are age 50 or older by the end of the year). |
| Catch-up Contributions | Yes | No |
Solo 401k Investment Options
Solo 401k plans offer a wide range of investment options, allowing you to tailor your portfolio to your specific financial goals and risk tolerance.
- Mutual funds: These funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets.
- Exchange-traded funds (ETFs): Similar to mutual funds, ETFs trade on stock exchanges and provide exposure to various asset classes like stocks, bonds, commodities, and real estate.
- Index funds: These funds track a specific market index, such as the S&P 500, providing broad market exposure at a low cost.
- Individual stocks and bonds: You can invest directly in individual companies or government bonds.
- Cash equivalents: These include money market accounts, certificates of deposit, and short-term Treasury bills.
The investment choices available in your Solo 401k will depend on the custodian or provider you choose. Some custodians offer a limited selection of investments, while others provide access to a wide range of options, including alternative investments such as real estate and private equity.
When selecting investments for your Solo 401k, it’s important to consider your age, risk tolerance, time horizon, and financial goals. You may also want to consult with a financial advisor to help you develop an investment strategy that aligns with your needs.
Contribution Limits
The maximum contribution limits for Solo 401k plans are determined annually by the IRS. For 2023, the contribution limit is $66,000 ($73,500 for individuals age 50 or older).
In addition to employee contributions, Solo 401k plans also allow for employer contributions. The employer contribution limit for 2023 is 25% of the participant’s compensation, up to a maximum of $66,000 ($73,500 for individuals age 50 or older).
Tax Advantages
Solo 401k plans offer several tax advantages:
- Tax-deductible contributions: Employee contributions to a Solo 401k are tax-deductible, reducing your current taxable income.
- Tax-deferred growth: The earnings in your Solo 401k grow tax-deferred, meaning you don’t pay taxes on them until you withdraw the funds in retirement.
- Qualified withdrawals are tax-free: If you meet certain requirements, withdrawals from your Solo 401k in retirement are tax-free.
Solo 401k and SEP IRA: Compatible Retirement Savings
For self-service business owners, both solo 401k and SEP IRA can coexist as valuable tax-advancing, and long-term planning aids.
Investment Variety
Solo 401k
- Mutual funds
- Index funds
- Target-date funds
- Stocks
- Bonds
- Real estate investment trusts (REITs).
SEP IRA
- Mutual funds
- Index funds
- Target-date funds
- Stocks
- Bonds
- Solos can also invest in:
- Certificate of Deposits (CDs).
- Mineral rights
- Real estate investment trusts (REITs).
Contribution Limits
Solo 401k SEP IRA Annual Limit Up to $65,000 in 2023
($75,000 including catch-up)Up to $66,000 in 2023
($76,000 including catch-up)Contribution Type Pre- or Roth (or both) Employer (100% deductible) Contribution Deadline December 31st October 15th (retroactive) Thanks for hanging out with me and learning about the compatibility of solo 401ks and SEP IRAs. If you’re still curious or have more questions, don’t be a stranger! Swing back by anytime, and I’ll be here to guide you through the maze of retirement savings options. Stay tuned for more financial wisdom and remember, don’t let retirement planning stress you out. You’ve got this!