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



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.

SEP-IRA vs SEP-401k: Which Retirement Plan To Choose - To learn more about this author, visit Jose Anes's Website.

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Jose Anes
(Visit Jose's Website)
Independent Computer consultant who has gained financial independence through good saving and investing practices.
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