Individual 401(k)
The individual 401(k) is another option for retirement savings for the self-employed individual. The plans are typically more complicated and time consuming to set up compared with the SEP-IRA. These accounts are designed for individuals, but spouses can also be eligible to contribute if working for the company. Therefore, you cannot have any other employees except a spouse to utilize this retirement plan.
The plans can be traditional or Roth in nature. Additionally, both employers as well as employees can make contributions to this account. Contribution limits are as follows. Employers can contribute up to 25% of compensation (cannot exceed 69,000 for 2024). Like a SEP-IRA, these contributions are usually deductible as a business expense. Additionally, employees can defer 100% of their compensation up to 23,000 into the individual 401(k). This account also allows for catch up contributions of 7,500 for those over 50 years of age. The combined employer plus employee contributions cannot exceed 69,000 for 2024 (if over 50, then 76,500). There is often more flexibility in investment choices with a individual 401(k) versus a SEP-IRA. Lastly, the individual 401(k) also allows for an option to take out a loan from the account (subject to rules and pay back) which is not possible with a SEP-IRA.
Summary: Advantages of Each Account
Sep-IRA:
- Easier to set up.
- May have lower administrative costs.
- Can be expanded to ALL employees if planning to hire additional employees in future.
- Contributions are tax deductible.
Individual 401(k):
- Both employees and employers can contribute.
- Less income required to max contribution (as 100% of employee compensation can be contributed up to 23,000 in 2024).
- May have more flexibility in investment choices.
- Ability to take out loan (subject to rules and pay back).
- Roth option exists.
- Does not limit ability to do backdoor Roth.
- Catch up contributions possible for those over 50 years.
- Contributions are tax deductible.
References:
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
https://www.fool.com/retirement/plans/solo-401k/solo-401k-vs-sep-ira/
https://www.forbes.com/advisor/retirement/sep-ira-vs-solo-401k/
https://thecollegeinvestor.com/38006/how-to-do-a-backdoor-roth-ira/
The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.
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