Can I Take Deductions for Sep and 401k?

Are you lot self-employed and want to invest your savings while lowering your taxes? Maybe you lot're a realtor, interior designer, or a TikTok influencer, and you want to finally create your own retirement program. Is Solo 401(chiliad) or SEP IRA better for you lot? In this commodity, I'm going to share a side-by-side comparison of the Solo 401(k) vs SEP IRA. These are the ii most pop means you can save if you're self-employed.

What is a Solo 401(yard)?

A solo 401(k), also called an individual 401(m), is a retirement programme for simply yourself. If you lot are self-employed or if you and your spouse are the only two employed in the business then this option may adapt y'all.

What is a SEP IRA?

A SEP IRA (simplified employee pension) is a retirement program that will suit yous if you lot have your own business and accept a small number of employees. Y'all tin contribute to your retirement savings and do the same for your employees.
Next, I volition share five of import solo 401(thou) and SEP IRA rules and features, how they stack upwards against each other, and I volition announce the winner of the two at the finish.

Circular #1
Who tin participate in Solo 401(grand) and SEP IRA?

And so permit's say you're a TikTok influencer. You just hit one million followers. Your income from ads and sponsorships are coming in and you lot want to invest that money wisely. The good news is you tin contribute to either a solo 401(thou) or SEP IRA. Simply the very important difference is this:
With a solo 401(chiliad), you can contribute both every bit an employer AND employee. With a SEP IRA, you can but contribute as the employer. Why should you lot care?
If y'all're the simply 1 in the company, you're not going to care, since you're both the employer & employee. But if yous have a W2 employee, say yous hired a virtual banana to help you out, you cannot contribute to a solo 401(k). That's why they telephone call it a solo 401(k). You need to be flying solo. If you have contractors who are 1099 employees, you can still contribute to a solo 401(k).

Here is one important consideration for the SEP IRA: Considering you're contributing as the EMPLOYER, if you contribute 10% of your income to your SEP IRA and you have a W2 employee, then yous as the Employer are as well required to contribute x% of your employee'due south income into his/her SEP. The contribution has to be equal across the lath.

Circular 1 Winner: It's a tie. You can employ both if you're self-employed. At that place is likewise a con to both if you accept a W2 employee.

Bonus Question: What if you're a TikTok influencer, and you gear up up an S Corp. Tin you ready a solo 401(k) for South corporations?

Answer: Yes. If you're a sole proprietor, S Corp, LLC or C Corp, and you don't have W2 employees, you can contribute to a solo 401(k).

Circular #two
Solo 401(thou) vs SEP IRA: What are the Contribution Limits?

For both solo 401(chiliad) and SEP IRA, equally the Employer, you can contribute upwardly to 25% of your compensation, upward to a maximum of $57,000 for the 2022 tax year, $58,000 for the 2022 tax year, and $61,000 for the 2022 tax year. Based on my experience, later on certain deductions and adjustments, it comes to slightly above 18% of my compensation. Piece of work with a tax accountant to get the exact pct right.

This is where you get to really take advantage of being a small-scale concern possessor. For almost people working as a regular employee, contribution limits are less than half that amount, $20,500 for 2022.

Then the employer solo 401(1000) contribution limit for 2022 and 2022 and SEP IRA contribution limit for 2022 and 2022 is the same. At present, if you have a solo 401(chiliad), you lot can also contribute as the employee! The employee solo 401(k) contribution limit for 2022 and 2022 is $20,500 for employees nether 50 and $27,000 for employees age l or older.

For example, if you're a realtor and you made $200,000 in 2022 with the help of the crazy hot real estate market place, you can contribute approximately 18% of 200,000 as the employer in either a solo 401(k) and SEP IRA. That's $36,000 that you become to invest and deduct from your taxes. Just with a solo 401(k), you can contribute an additional $20,500 as an employee! That'south a total of $56,500!

Round two Winner: Solo 401(1000) wins because of that additional $20,500 employee contribution allowed.

Round #3
When is the Contribution Borderline for Solo 401(yard) and SEP IRA?

For 2020, the contribution borderline for the Solo 401(thou) as well as the contribution deadline for the SEP IRA has been extended to May 17, 2021. This deadline is specifically for the employer contributions.

If you lot're setting up a solo 401(thou) but now for the tax year 2020, yous cannot contribute equally an employee, unfortunately. Simply y'all tin exercise so for the taxation yr 2021. The takeaway is you still have time to create and put in money to either a solo 401(k) or a SEP IRA, as the Employer. Make sure yous do this before the deadline. Have a break from uploading your TikTok video for a day!

Round iii Winner: Information technology's a tie. The Solo 401(k) contribution deadline and SEP IRA contribution borderline are the aforementioned.

Round #4
Which is better for taxes: Solo 401(k) or SEP IRA?

Say you lot're an interior designer and you contribute to a SEP IRA. You become to deduct those contributions from your tax return. Just in one case yous withdraw from your SEP IRA during retirement, y'all'll have to pay federal & maybe country taxes on the corporeality you withdraw.

For a solo 401(thousand), you can normally cull the tax treatment. If yous want to take the tax deduction now, you tin can contribute to a traditional solo 401(chiliad). If you want to permit your money grow tax-gratis, you can contribute to a Roth solo 401(g). Y'all pay the taxes now, but when y'all withdraw from a Roth solo 401(k) during retirement, you don't pay a single dime in taxes.

Round iv Winner: Solo 401(one thousand) wins again.

Round #5
How easy is it to set it upward & maintain a Solo 401(1000) or SEP IRA?

They're both actually like shooting fish in a barrel to set up. When you lot open a solo 401(k), the provider will unremarkably create a solo 401(chiliad) plan certificate for you. There are several solo 401(k) providers you can choose from. If you're a fan of Vanguard, you can create a Vanguard solo 401(k). You lot can too create a Fidelity 401(chiliad) or ETrade solo 401(k). One downside with a Vanguard solo 401(k) is it does non let y'all to roll over an existing IRA into your Vanguard solo 401(k). For about ii years, I kept calling Vanguard to ask if they volition allow this feature before long. We got tired of waiting and ended upward opening another solo 401(one thousand) with Etrade. I downside with a Fidelity solo 401(k) is it does not have a Roth 401(k) selection.

If you're setting upward a SEP IRA, it's pretty straightforward to do and then via Vanguard or Fidelity or ETrade.  A lot of people forget this next footstep though. You will need to complete a Grade 5305-SEP. Information technology's merely one-half a page long. No need to file with the IRS. This course officially creates your SEP IRA program.

How easy is it to maintain: Solo 401(k) vs SEP IRA? Both are easy. However, with a solo 401(k), once the plan's assets reach $250,000, you'll need to file a Form 5500 each year to remain in compliance with IRS rules.

Round 5 Winner: SEP wins, since in that location's a bit more paperwork with a 401(k).

Who wins overall – Solo 401(k) vs SEP IRA?

There are two ties. The solo 401(k) got 2 points. The SEP IRA got 1 point. Solo 401(k) wins our match!

Solo 401(thousand) vs SEP: Which is amend for you?

It depends on your situation.  If you tin can contribute a lot of coin to information technology, maybe solo 401(k). If y'all like keeping things simple, SEP IRA is easier to open and administer.

Phone call To Activity:

Now that you have a retirement plan for your real estate, interior design, or TikTok influencer modest business organization, don't forget you still can contribute to either a traditional or Roth IRA, in addition to a solo 401(1000) or SEP IRA. If you make too much money to contribute to a Roth IRA, but yous're interested in taking reward of a legal tax loophole to grow your money revenue enhancement-free, watch our video: How to do a Backdoor Roth IRA – 3 Piece of cake Steps!

Alvin Carlos, CFP®, CFA is an investment advisor and fee-just financial planner, in Washington, D.C that works with clients across the country. He has a Master's degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital letter, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help drag your finances.

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Source: https://districtcapitalmanagement.com/solo-401k-vs-sep-ira/

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