Rocket Dollar Knowledge Base

What advantages does a Self-Directed Solo 401(k) have over a SEP-IRA?

A Rocket Dollar Self-Directed Solo 401(k) allows for employee salary deferral contributions, company matching, Roth contributions, and profit sharing. The SEP-IRA only allows for profit sharing contributions.

What are the advantages of a Self-Directed Solo 401(k)?

  • Checkbook control for any investment
  • You can reach the maximum annual contribution limit quicker since the Self-Directed Solo 401(k) has both salary deferral and profit sharing. (A SEP only includes profit sharing)
  • $19,000 contribution limit for self-employed income deferrals. Individual employee salary deferrals are not allowed in SEP IRAs.
  • Catch-up contribution limits for those over 50 that allow $24,500 self-employed income deferral
  • Employer contributions (company matching) of up to 25% of total salary compensation OR 20% of profit sharing, with an upper limit of $55,000 for 2018.
  • A designated Roth account option in a Solo 401(k), which is not available in the SEP-IRA

What if I have both a SEP and a Solo 401(k)?

You can have both accounts; however, in many situations, the Self-Directed Solo 401(k) has more benefits. Having both a SEP-IRA and a Self-Directed Solo 401(k) will not allow a business owner to defer more than $55,000 for 2018 and $59,000 in 2019.

Is there any time I should definitely go for a SEP-IRA?

If you have any number of full-time employees, you will need to go for a SEP-IRA over a Solo 401(k). The SEP-IRA can be a great option for smaller workforces. Be aware that you will have to give all employees company plan (employer) contributions equal to those of you own. You can read more about the Self-Directed SEP-IRA here.

This applies to ALL eligible workers for the plan.

  • The employee is 21
  • The employee has worked for the employer for at least 3 out of the last 5 years
  • The employee has received at least $600 in compensation

This doesn't apply to

  • Employees covered by a union agreement
  • Employees who are non-resident aliens and don't collect US wages

 

Read more about our Self-Directed Solo 401(k)