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Solo 401ks and SEP-IRAs: Which Wins for Me?

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Last year, I decided that it was time to get involved in a SEP-IRA. It only took about two years since my friend at RateLadder suggested the advantages of SEP-IRAs. It's not so much that I was procrastinating, but that I needed my self-employment income to, well, buy stuff I needed.

While I knew about Solo 401ks, for some reason, I didn't investigate them in detail. I think I perceived them as more difficult to get going. The other day I thought it might be time to revisit that situation. Here's what I found.

About the Solo 401k

The Solo 401k is pretty much what you might expect... a 401K for self-employed individuals. In fact it's often called an individual 401k. The idea is that you get the advantages of a 401k plan that regular employees do. Of course it's not a pre-tax deduction do to the self-employment aspect of it (how would you withhold from a paycheck).

Why the Solo 401K seems right for me...

It all comes down to maximizing my tax deferrals. In 2010, the Solo 401K allows you to defer up to $16,500, plus 25% of my profits. The math is a little confusing and enough to make my head spin. So I'm going to link you to my friend Madison at MyDollarPlan's analysis of Solo 401k Versus SEP-IRA. You'll note that the Solo 401K allows for one to defer more money - significantly more money.

In theory one could defer $65,500 with the Solo 401k. However, I don't make nearly enough money to make that happen. I'm hoping for a situation where I'm allowed to defer about $20,000. If I had to take a guess, I think that's about where I would end up. At age 65 (31 years from now), that money should come in quite handy.

[Note: I'm not a tax guru, so these are mroe free-form thoughts. I will seek the advice of my tax advisor.]

Posted on June 22, 2010.

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3 Responses to “Solo 401ks and SEP-IRAs: Which Wins for Me?”

  1. Andy says:

    The one thing I found is that you can combine a SEP-IRA with a 401K from your work and actually combine the maximum limits from both. So if one’s blog, as is the case with me, is a part time venture then I could put most of the profits into a retirement plan and live off all the day job wages.

  2. Tom2kirk says:

    So why ont go with something like CEF’s?
    They return a very good rate and you can generally find CEF’s that pay out monthly.

    Go with these for about 6.5 yrs and along with the DRIP’s for each. A weekly investment of 70 dollars and you got retirment income. You keep contributing 10 percent after the 6.5 years to increase the milk fund.

    You qill spend roughly 45,000 dollars of your money. Add to that the DRIP money and you have one heck of an income for life.

  3. Rocky F.W.LeMar says:

    I like the SOLO 401K thing. I will start buying 401K’s again.
    I was forced to cash in my 9K in still left in my fund i did not know i still had. They kept 2K for taxes. I could have waited 1 week and saved the 2K, but I need the Funds quickly so I lost the 2K but got 7K. I will see next tax year season if I get my 2K back or not.

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