Thursday, September 2, 2021

Retirement Savings: SEP vs. Solo 401(k)

My partner and I just got back from our vacation out west and almost immediately hit our local farmer's market to restock our kitchen.  The place was exploding with abundance!  It was amazing.  All of the things I had been wanting were suddenly available to me.  Sometimes it feels that way with abundance, doesn't it?  It feels as if you place your order to the universe, wait for months on end, and then suddenly the floodgate opens?  While I would agree that we all manifest abundance in our lives, I would also add that much like the farmer's market scenario if you were to rewind the clock a bit, you would find that there were a number of inspired actions along the way.

There is a degree of anticipating your desires in play.  Once upon a time, someone anticipated their own desire for fresh ears of golden corn, and it lead them to an action.  They planted a seed into the ground, treated it with care, and watched as it grew. With enough seeds and enough care, those seeds would transform into such abundance that they would provide not only for their desires but also be able to meet the needs of others.  This doesn't lessen the power of the idea of manifestation itself, but rather strengthens it by highlighting the very idea that we can perceive something which we want, and become inspired to take actions that ultimately lead us to the abundance we long for.  

We can all anticipate the kind of lifestyle we long for in our golden years.  Those of us with vivid imaginations can see it crystal clear.  The more you hold the image of what you want in your mind, the more you should find yourself drawn to it.  You'll find yourself compelled to take these little actions that narrow the gap between where you are and where you want to be.  Where planning for the future is concerned, this inspired action might involve taking a look at the abundance that already surrounds us and choosing to set a bit of it aside.  Just as the farmer enjoys some of their bounty and preserves some for the future, so should we preserve some of our current abundance for the future.  Just as food preservation wasn't a skill known by everyone, saving money for retirement may not necessarily be second nature either.  It may require a bit of research in order to learn about what will work best for each individual situation.

So, this week, I'd like to focus on comparing and contrasting two retirement savings vehicles intended for small businesses: the SEP vs. the Solo 401(k).  Nowadays, there are a plethora of individuals working in the gig economy, freelancing, or starting their own small businesses.  While some are doing so to supplement their regular 9-5 income, for others, it's a primary income source.  In either account, IRAs are great places for these individuals to start, but when you're looking to defer a larger amount of money, you might need to look elsewhere, which is where SEPs and Solo 401(k)s can come in.


The Self-Employed retirement Plan or SEP was originally established to let small business owners establish retirement accounts without the headache associated with ERISA-sponsored plans (think 401(k)).  Eventually, the Solo 401(k) came along, which allowed business owners to enjoy some of the perks associated with 401(k) plans without many of the accompanying headaches.  Oftentimes, a Solo 401(k) is considered to be superior to a SEP, although it comes with heftier reporting requirements.

Who can contribute?

With a SEP, a business owner contributes on behalf of themself and any eligible employees.  Think profit sharing.  Whereas a Solo 401(k) allows both employer and employee to make contributions.  It is important to notes that a Solo 401(k) is designed for a solo practitioner.  

Contribution Limits:

Contributions to a SEP are limited to the lesser of 25% of business revenue; 20% for a sole proprietor or single-member LLC, or $58,000.  Contributions are not reduced by your contributions to another 401(k) if you are employed by a separate business other than the one you own.  This is a big deal!

Solo 401(k)s allow the employee to contribute up to $19,500 (for 2021; changes annually) plus a profit-sharing contribution of up to $38,500 (for 2021) for a total of $58,000.  Contributions to the Solo 401(k) cannot be more than 100% of your compensation.  Also, if you have another job with a separate employer that has a 401(k) plan you are contributing to, your combined contributions (combination of the Solo 401(k) and other 401(k)) cannot exceed $19,500.  So, you cannot double up here!  This is notably different from the SEP!

Catch-Up Contributions:

Unfortunately, SEPs do not have a provision for catch-up contributions, but Solo 401(k)s do!  Solo 401(k)s, like any other 401(k) allow a catch-up contribution for those ages 50+ in the amount of $6,500 (in 2021; subject to change annually).

Roth Option?

SEPs do not have Roth options, but Solo 401(k)s do!  So, if you want to contribute after-tax dollars, you might prefer a Solo 401(k).


You cannot take a loan from a SEP.  A Solo 401(k) will allow loans for the lesser of 50% of the plan balance or $50,000.  I have to be honest, I don't love the idea of taking a loan against a retirement account, but there's the info!


Even those working full time, oftentimes have other sources of income from freelancing, contracting, or their own side-businesses.  If you have a small business or are considering one, it is important to consider how you can structure your finances in a way that allows you to save for retirement so that you can manifest the future of your dreams.  

For Further Reading:

Retirement Savings: Traditional IRA vs. Roth IRA

Retirement Savings: Roth IRA vs. Roth 401(k)

Retirement Savings: 401(k) vs. 457

My 3 Bucket Approach to Retirement Savings

A Roth vs. Traditional IRA (This one is from 2017, so some of the info is old but the chart in this piece is pretty useful still)

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