SEP-IRA vs SEP-401k: Which Retirement Plan To Choose

Definitions first:

* A SEP-IRA allows up to 25% of compensation (up to $45,000 for 2007) to be stashed away in a tax-deferred account (to be used at retirement age, just like any other Traditional IRA).
* A SEP-401k allows up to $15,500 in salary deferrals, like any other 401k plan (employee contributions) and up to 25% of compensation in “employer” contributions (up to $45,000 total, between the “employee” and “employer” contributions). The catch: the small business can only have the owner and his/her spouse as the only two employees: no other employees allowed.

Which one to choose depends on the individual conditions of every small business owner. The SEP-IRA is extremely simple to handle, fund, open, and report. However, the SEP-401k can potentially allow you to stash more money away from Uncle Sam’s (for a while): especially true for most people who don’t earn $200,000 on their small business. A small business owner that earns $100,000 (after expenses) can stash away $15,500, and on top of that, 25% of the $100,000 ($25,000) for a total of $40,500. The SEP-IRA owner could only stash away the $25,000. Big difference!Uncle Sam always presents you with a catch. The SEP-401k is only available to very small business: owner and spouse. If you plan to have employees, like I do… you can’t use it. The other catch is if you already have a 401k in another job. The 15,500 401k limit is for all jobs you hold, and if you are already stashing money away from an employer, you might not be able to stash the full amount using the SEP-401k.

For most independent consultants, you may want to go for the SEP-401k. For those with aspirations of growing your business in the VERY near future or those that alternate between gigs and full time jobs: go with the SEP-IRA.

Regardless, you should choose at least one of them. After all, you need a way of saving more for retirement. Independent people don’t have pensions, and due to lack of provisions for the self employed on Health Insurance Portability Act, health insurance costs may be higher than for those with full time jobs when you reach retirement age.

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Michiel Jonker As a Certified Information Systems Auditor, Michiel assists businesses in a professional capacity by evaluating the threats to their businesses. He acquired the necessary knowledge, skills, and techniques to minimize a business owner’s risk of business failure and to maximize his chances of high growth and success. He strongly believes that you CAN maximize your chances of business success, by implementing the business solution he has advocated for more than 12 years in your business plan and planning. Michiel has decided to share his experience with business owners by putting almost everything he knows in a business plan and survival guide (compiled in an e-book format) and written as a high growth SMB coaching course for SMB business owners, directors and managers - titled as the “Survival Kit for Small and Medium Businesses - Profit from your Business Risks!” According to Michiel, his goal was to add new techniques to a business owner’s business planning survival kit and instruct him or her in using these in the future - without any help from a consultant! For more information about the benefits of implementing profit protection planning in your business, please visit: http://www.business-around-the-globe.com - Visit Michiel Jonker's Website

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