SEP IRA versus Self-Employed 401(k)
I am trying to get a handle on the best option for my husband's business retirement needs. He is self-employed and we need to start some type of retirement savings for him. I thought I was settled on a SEP IRA. But then found Self-Employed 401(k) and am a bit unsure which direction to go. We are both employed by his business so it seems the self-employed 401(k) may be the way to go. It appears the self-employed 401(k) acts like a traditional 401(k) but can also allow for profit sharing deferment as well, so we could go beyond the max 401(k) contribution. Anyone have any experience our insights on this? Thank you!
If the company has no employees other than owners and their spouses, then a one participant 401k (it can be marketed under many different names) is the way to go.
The contribution rules are dependent on net business income amounts to determine limits as well as whether the company is an S Corp or Schedule C. But there is an opportunity to contribute more as an employee and employer than with a SEP-IRA.
In addition, if your income is high enough that you can no longer make deductible Traditional IRA contributions or normal Roth IRA contributions, a SEP-IRA will get in the way of doing a backdoor Roth.
As for which one participant 401k provider to go with, it depends on your needs, and there are pros and cons with most of them. I moved from Vanguard to Fidelity because I needed the ability to roll in a traditional IRA, which Vanguard doesn't offer.
Honestly, I think this decision is important enough that you should consult a professional financial advisor. The information online can be confusing if you're not familiar with all the terms and how exactly they work together when it comes to saving now and disbursement later - and self-employment makes it even more confusing. I highly recommend that you ask for some professional advice - if you're part of a credit union, they may offer this for free, but if you can't get it for free, your future is well worth the fee for a 1 hour consult. Good luck!
The easiest and quickest to setup is the SIMPLE IRA. I recommend people start there (that don't have anything) because in the time you putz around researching, you can have the account paperwork out the door and get started.
The Solo-401K let's you put away more than the SEP, but is often higher fee. Between the two of you, you can do $25K in the SIMPLE. If that's not enough, then you can do the SEP. If the SEP isn't enough, do the Solo-401K. The fees are generally higher on the more complex plans, which is why I love the Schwab SIMPLE for any time we don't have employer retirement plans.