Should you’re self-employed, you possible put on a number of ill-fitting hats: accountant, admin, HR rep. And that final one is low-key necessary, as a result of it means nobody is establishing a retirement plan for you.
So what’s a gig employee, small enterprise proprietor, or solo practitioner to do?
There’s the trusty IRA, in fact. However its tax advantages section out at sure revenue ranges, and its $7,000 annual contribution restrict fills up quick. It’s your decision—or want—to avoid wasting extra to comprehend your retirement purpose.
Fortunately, two lesser-known retirement accounts provide self-employed staff 10x extra capability for tax-advantaged investing: the solo 401(okay) and the SEP IRA.
They’re related in that sense (excessive contribution limits), however additionally they differ in some necessary methods. We’ve discovered that for a lot of self-employed staff, selecting between the 2 usually hinges on their hiring or lack thereof:
👉 No staff past a partner, and no plans to rent?
- Contemplate a solo for those who prioritize Roth entry and a slight edge in contribution limits.
- Contemplate a SEP for those who prioritize much less administrative work.
👉 See your self hiring just a few staff within the not-so-distant future?
- Contemplate beginning with a solo 401(okay), then transitioning to a gaggle 401(okay) plan for those who prioritize Roth entry and extra flexibility in the way you construction worker contributions.
- Contemplate a SEP for barely simpler admin, and the power to pause contributions to your staff’ SEPs throughout down years.
👉 Planning to increase past 5-10 staff in some unspecified time in the future?
- Contemplate the solo-to-group 401(okay) transfer for extra flexibility in the way you construction worker contributions. You may max out your personal retirement financial savings, for instance, whereas letting staff resolve their very own contribution charges.
That’s the TL;DR model. For a deeper dive, let’s examine the 2 accounts throughout just a few classes:
Excessive contribution limits
Each accounts allow you to save loads for retirement—upwards of $70,000 a 12 months—however solos provide you with a few methods to stretch that even additional:
Case #1: You’re enjoying catch-up
Should you’re age 50 or older and catching up in your retirement financial savings, a solo 401(okay) provides extra “catch-up” contributions of $7,500 annually, or $11,250 for these 60-63.
Word that beginning in 2026, any catch-up contributions should go right into a Roth solo particularly (extra on these under) for those who acquired greater than $145,000 in FICA wages (salaries, commissions, and many others.) the prior 12 months out of your solo’s sponsoring firm.
Case #2: You’re a center class tremendous saver
Say you earn lower than $280,000, however you save effectively above the usual recommendation of 10-15% for retirement. On this state of affairs, you could run up towards the SEP’s 25% compensation cap earlier than you attain its general $70,000 restrict. However with solos, you possibly can contribute as each an employer (as much as 25% of compensation) and an worker (as much as $23,500) till you hit the general restrict.
⚖️ Benefit: solo 401(okay)
Straightforward admin
Each a solo 401(okay) and SEP IRA, assuming they’re streamlined digital choices corresponding to ours, are easy to arrange. You may open a Betterment SEP fully on-line, whereas a Betterment solo requires a fast name with our Licensed Concierge staff to get the ball rolling.
Every account kind is comparatively low upkeep as effectively. Neither a SEP nor a solo require annual paperwork, with the one exception being for solo 401(okay) balances that exceed $250,000. In that case, the IRS requires solo homeowners (aka “sponsors”) to file Type 5500-EZ. Whereas we’re not a tax advisor, and at all times suggest working with one, the shape is comparatively easy to fill out.
⚖️ Benefit: SEP IRA
Suss out a solo vs. SEP with the assistance of an advisor.
Roth entry
Solos and SEPs are designed for retirement, so the IRS provides particular tax remedy to each account varieties. However in observe, solos provide you with not one however two completely different flavors of tax remedy to select from:
- You may contribute with pre-tax {dollars} through a standard solo 401(okay), decreasing your taxes now and liberating up more cash to take a position.
- You even have the power to contribute with after-tax {dollars} through a Roth solo 401(okay), having fun with tax-free withdrawals in retirement. And Roth solo 401(okay)s include two added bonuses:
- In contrast to conventional retirement accounts, they’re not topic to Required Minimal Distributions (RMDs) in retirement.
- In contrast to Roth IRAs, they arrive with no revenue limits of any type.
Roth SEP IRAs, in the meantime, have technically been allowed by the IRS since 2023, however few suppliers have rolled them out but.
⚖️ Benefit: Solo 401(okay)
Small enterprise development
In some unspecified time in the future in your self-employed journey, you could deliver on employed assist. On this case, it’s attainable to transition each account varieties to accommodate staff. Some SEP suppliers allow you to shift from a solo practitioner to an employer who contributes to staff’ SEP IRAs on their behalf. However there’s a catch: you will need to contribute the identical quantity to their SEPs as you do your personal, which can show difficult relying on your enterprise.
With solo 401(okay)s, however, you possibly can embody a partner from the get-go, offered they’re an worker or co-owner of the enterprise. And for those who see the potential for increasing past a handful of staff down the highway, it could make sense to merely transition your solo 401(okay) to a gaggle 401(okay) plan and luxuriate in extra flexibility in the way you construction contributions to your staff. Our help staff handles strikes like this usually and may help you when the time comes.
⚖️ Benefit: Solo 401(okay)
So which account is best for you?
The excellent news is each SEP IRAs and solo 401(okay)s provide wonderful tax benefits that may assist you to attain retirement faster. We provide each at Betterment, and make it straightforward to open both one. As a result of while you’re self-employed, you’re busy working your enterprise. Optimizing your retirement financial savings? Go away that to us for one much less hat in your wardrobe.
