A New Kind of Retirement Plan

I know that the topic of retirement plans isn’t very sexy, but saving for retirement is an important activity, especially for the self employed! We have no company-provided pensions, no matching funds, no company-sponsored plans. Plus, all the contributions you put into a qualified retirement fund are tax deductible – how sweet is that?

I’ve had multiple retirement plans – Keoghs, profit-sharing, SEP IRA – so what’s so great about this new plan? Let me introduce the Individual (or Solo) 401K.

The SEP IRA and the Individual 401K are the two most common retirement plans for self-employed and owner & spouse businesses because they both have high contribution limits and flexibility on annual contribution amounts. While Individual 401Ks have a a bit more paperwork than a SEP IRA, they also allow a larger annual contribution. Another important difference is that you can borrow from an Individual 401K (up to half of the plan’s value to a max of $50,000), whereas you can’t borrow from a SEP IRA.

SEP IRA

  • 2024 contribution limit is $69,000
  • Easy to set up and administer
  • Smaller contribution than the Individual 401K and also doesn’t allow the additional $5,500 catch-up contribution that the Individual 401K allows
  • You can convert a SEP IRA account to a Individual 401K with a small amount of paperwork.

Individual 401K

  • 2024 contribution limit is $69,000 ($76,500 if over age 50)
  • Although the maximum contribution limit is identical, the equation to calculate the contribution allows you a higher contribution at the same income level
  • Loans are allowed, up to 50% of the account, maximum of $50,000
  • There is slightly more paperwork to setup and administer an Individual 401K

If you already have a SEP IRA, don’t fret. For next year, stop your contributions to your SEP-IRA and start up the Individual 401K (You can’t have both plans active in the same calendar year). You’ll need to set up the new account by December 31.

Retirement planning is an important topic for the self-employed! Take responsibility for your retirement savings and get some great tax deductions while you’re saving!

To learn more, check out the Vanguard website.