Self-employed employees put on many hats. Accounting, admin, you title it. And that does not even embody saving for retirement.
Relying in your revenue, you should still have entry to the tax advantages of an IRA, however some of us shortly run up in opposition to its $7,000 contribution restrict. They might need (or want) to save lots of extra.
So what’s a gig employee, small-business proprietor, or solo practitioner to do?
Fortunately, two accounts provide as much as 10x the capability for tax-advantaged investing: the solo 401(ok), and the SEP IRA. Generally, SEPs are usually higher for enterprise homeowners planning to rent workers sooner or later. Solos, in the meantime, usually make sense for self-employed people with out workers apart from a partner.
However the perfect match for you’ll rely upon your online business mannequin, revenue stage, and monetary objectives. So that can assist you make a choose, let’s examine these accounts throughout three classes:
Excessive contribution limits
You may contribute roughly the identical (upwards of $70,000) to every account sort yearly, however solos have a slight edge in two instances:
Case #1: You are over the age of fifty and taking part in catch-up. On this case, a solo 401(ok) affords further catch-up contributions of $7,500 every year, or $11,250 for these between the ages of 60 and 63.
Case #2: Say you are a brilliant saver, somebody whose saving charge is effectively above the usual recommendation of 10-15%, however you earn lower than $280,000. You can save extra in a solo on this state of affairs, as a result of not solely are you able to contribute as much as 25% of your revenue as an employer (the identical as a SEP), solo 401(ok)s will let you contribute as much as $23,500 as an worker as effectively.
Benefit: solo 401(ok)
Straightforward admin
Merely put, a solo 401(ok) takes extra work to arrange, and in contrast to a SEP IRA, it requires annual reporting as soon as its stability exceeds $250,000. However there is a massive caveat right here. You probably have a trusted advisor—and a really fashionable solo 401(ok) providing like our personal—they’ll deal with the heavy lifting of setting one up and retaining it compliant year-in and year-out.
That is largely why we provide solo 401(ok)s as an unique Betterment Premium providing. Premium places a crew of advisors in your nook, specialists who can’t solely help with all issues solos, however enable you to make the choice of whether or not to open one within the first place. When you determine a Betterment solo 401(ok) is best for you, a paperless and nice expertise awaits.
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Put a crew of advisors in your nook with Premium.
Flexibility
Each SEPs and solos provide flexibility, however in several methods. A solo 401(ok), for instance, permits for Roth (aka after-tax) and/or conventional contributions.
However relying on your online business objectives, the power to scale your online business and hold saving could also be crucial sort of flexibility for you. Generally, SEPs will let you shortly shift from a solo practitioner to an employer who contributes to workers’ SEP IRAs on their behalf. The one catch is you have to contribute the identical quantity to their SEPs as you do yours.
With Betterment’s solo 401(ok), nonetheless, our advisors can transition the plan to a gaggle 401(ok) do you have to rent workers past your partner. A bunch 401(ok) requires extra work to manage, however affords extra flexibility than a SEP in the way you construction contributions for you and your workers.
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So which account is best for you?
The excellent news is each SEP IRAs and solo 401(ok)s provide glorious tax benefits that may enable you to attain retirement faster. We provide each at Betterment, and make it straightforward to open both one. As a result of if you’re self-employed, you’re busy operating your online business. Optimizing your retirement financial savings? Contemplate that one much less hat in your wardrobe.
