Self-employed staff put on many hats. Accounting, admin, you identify it. And that does not even embrace saving for retirement.
Relying in your revenue, you should still have entry to the tax advantages of an IRA, however some of us rapidly 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 supply as much as 10x the capability for tax-advantaged investing: the solo 401(okay), and the SEP IRA. Usually, SEPs are typically higher for enterprise house owners 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 one of the best match for you’ll rely on your enterprise mannequin, revenue stage, and monetary targets. So that can assist you make a decide, let’s evaluate these accounts throughout three classes:
Excessive contribution limits
You may contribute roughly the identical (upwards of $70,000) to every account kind yearly, however solos have a slight edge in two circumstances:
- Case #1: You are over the age of fifty and enjoying catch-up. On this case, a solo 401(okay) affords further catch-up contributions of $7,500 annually, or $11,250 for these between the ages of 60 and 63.
- Case #2: Say you are an excellent saver, somebody whose saving charge is nicely above the usual recommendation of 10-15%, however you earn lower than $280,000. You’ll save extra in a solo on this situation, 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(okay)s help you contribute as much as $23,500 as an worker as nicely.
Benefit: solo 401(okay)
Simple admin
Merely put, a solo 401(okay) takes extra work to arrange, and in contrast to a SEP IRA, it requires annual reporting as soon as its steadiness exceeds $250,000. However there is a huge caveat right here. If in case you have a trusted advisor—and a really trendy solo 401(okay) providing like our personal—they’ll deal with the heavy lifting of setting one up and holding it compliant year-in and year-out.
That is largely why we provide solo 401(okay)s as an unique Betterment Premium providing. Premium places a staff of advisors in your nook, consultants who cannot solely help with all issues solos, however enable you make the choice of whether or not to open one within the first place. Should you determine a Betterment solo 401(okay) is best for you, a paperless and nice expertise awaits.
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Put a staff of advisors in your nook with Premium.
Flexibility
Each SEPs and solos supply flexibility, however in numerous methods. A solo 401(okay), for instance, permits for Roth (aka after-tax) and/or conventional contributions.
However relying on your enterprise targets, the flexibility to scale your enterprise and hold saving could also be a very powerful kind of flexibility for you. Usually, SEPs help you rapidly shift from a solo practitioner to an employer who contributes to workers’ SEP IRAs on their behalf. The one catch is you need to contribute the identical quantity to their SEPs as you do yours.
With Betterment’s solo 401(okay), nonetheless, our advisors can transition the plan to a bunch 401(okay) must you rent workers past your partner. A gaggle 401(okay) 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(okay)s supply wonderful tax benefits that may enable you attain retirement faster. We provide each at Betterment, and make it straightforward to open both one. As a result of whenever you’re self-employed, you’re busy working your enterprise. Optimizing your retirement financial savings? Think about that one much less hat on your wardrobe.
