Ask the Hammer: Should I Set Up a SEP-IRA or a Solo 401(k)?

Key Takeaways

• With $100,000 in self-employment income, you can contribute ~$20,000 to a SEP IRA but significantly more to a solo 401(k) due to salary deferral plus profit-sharing components; at $500,000+ income, both plans hit contribution caps equally
• Solo 401(k)s must be created and identified before December 31st to include salary deferral contributions, but the profit-sharing portion can be added retroactively before your tax filing deadline
• SEP IRAs and other employer-funded plans can be set up retroactively until your business tax filing deadline (April 15th, March 15th, or October 15th depending on your entity type), providing more flexibility than solo 401(k)s
• Solo 401(k)s offer loan provisions and life insurance purchase options that are prohibited in SEP IRAs, so evaluate these ancillary features if they matter to your financial strategy
• If you have employees, factor in the cost of employer contributions required under each plan type—this is often the primary decision driver for small business owners