As a real estate agent, there are two major retirement plans that you can invest in – a SEP IRA and the Solo 401k.
I often get asked, what are the differences and how do I know which one is right for me. Here, I’d like to address some of the major features of these plans so that you can make the right decision.
Both the SEP IRA and the Solo 401k are tax-deferred retirement plans, which means the money grows tax free until you retire at which point you pay taxes both on the contributions and all the growth that you've incurred throughout the years.
SEP IRA is an employer-based plan, which means that you invest and contribute to this plan as an employer. And if you have any employees, you need to contribute to their plans in the same proportion of their compensation that you contribute to yourself.
The Solo 401k is a more traditional 401k plan, profit sharing plan, and you have two types of contributions. You can contribute to your plan as an employee and also as an employer. The solo 401k is for the solo business owner, but also for their spouse. So, if your spouse works in the business and helps you out, and if they are not covered by a corporate retirement plan, then you can use this plan to invest for both of you.
Additionally, with Solo 401ks, you can contribute $20,000 annually and you can have a catch-up contribution if you're over 50.
The SEP IRA does not have a catch-up contribution option.
There are differences in how your contributions are calculated. With the SEP IRA, you can invest up to 25% of your income to your plan and the way you calculate your income you take your gross income from your business, you deduct your ordinary business expenses and you also deduct half of the self-employment tax that you pay for yourself. With that, you get to net adjusted earnings and you can save 25% of it into your SEP IRA. With a solo 401k, you can invest the employee portion of your income, again, up to the limit without making this calculation first.
So in a way with the solo 401k, you can invest quicker and sooner and more, depending on where your business income is, so you need to make a calculation to compare both plans.
Another major difference between these two plans, that the deadline for the contribution and opening the plan for the SEP IRA is your tax filing deadline.So whether you file taxes in April, or you get an extension, you have all the time to contribute to the SEP IRA. With the Solo 401ks, the plan needs to have been opened by December 31st of the calendar year for which you pay taxes and you need to have contributed as an employee to this plan before December 31st. You do still have a choice of contributing as an employer from the profits of your business, again until April or your extension deadline.
As you can see, there are major similarities, but also differences between these two plans. They're both great vehicles for your retirement and you should definitely invest in one of them. There are a few details that you should be aware of as I spoke and consult with a financial professional to really guide you and make sure that you're making the right decision.
I'm happy to speak with you about these retirement plans to make sure that you pick the right retirement plan, pick the right strategy and the right amount that will position you best for retirement.
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