Solo 401(k) vs SEP IRA

Chances are if you’re reading this you are one of two types of people. You’re either someone who is considering becoming a contractor, has just accepted a job as a contractor, or are just starting a job as a contractor and want to know what your options for retirement accounts are. If that’s the case, good job! You’re right where you need to be and you’re making a smart decision by actively seeking out options to better your future.

The other possibility is that you’ve been a contractor for a while now, and you’re just starting to get wise to the need to save for retirement and the awesome tax savings you can get from some of the tax deferred retirement accounts available to you. If this is you, don’t worry! You might be thinking you’re a little late to the punch, and depending on your situation that may be true, but you’re proactively searching out resources which means you’re heading in the right direction, and there is no better time to start than now.

Retirement Accounts for Contractors (1099)

There is good news and bad news when it comes to being a contractor. The good news is that you have options! You aren’t tied down to any single plan like some of your employee counterparts. You can pick and choose what you want to do with your money. You choose when you want it taxed (kinda), and there are no limitations on which investments you buy. To sweeten the deal even more, maximums are typically much higher for contractors than employees, so if you’re a hardcore saver or a high earner, you’ll be able to reap the tax benefits on a larger portion of your income!

Now for the bad news. There is no plan set up for you. I know this sounds a lot like the good news, but really they are two sides of the same coin. You’ll have some important decisions to make in investing for retirement, and that will require time and research to even get started. This contrasts drastically from employees who if they really wanted to could just toss money into the retirement account that was made for them and hope for the best.

Setting up a retirement account can be daunting, but you’d be silly not to take advantage of the privileged situation you’re in. This guide will be able to give you a brief overview of some options that you have, but it isn’t all-inclusive, and it won’t be enough to make a decision on. So read on and see what interests you, and kick off your research from there!

Self-Employed 401(k)

There are many names for this 401(k): Self-employed 401(k), SE401(k), Solo 401(k), one participant 401(k) and many others. The gist of the matter is this though: the retirement vehicle is designed for an individual business owner without any workers. Contributions up to $58,000 are allowed in 2021 if you’re under age 50, with an additional $6,500 allowed if you’re over 50.

There are some additional restrictions based on your income, but the rules are a little more complicated and few people reach the limits so I will save the details for another article. If you plan on opening one of these and are a high earner, I highly recommend doing some reading before you start contributing to make sure you’re in compliance with the law.

SEP IRA

The SEP IRA and the SE 401(k) are similar in many regards. The contribution limits are the same with the exception of people over 50 who are not allowed to make “catch up contributions”. Additionally, Some of the more in-depth rules may make the maximum amount you can contribute toward your plan lower than the SE 401(k) if you are planning on contributing more than 20% of your income.

There is a good reason to pick this option over the SE 401(k) though: These accounts are typically seen as easier to set up and have slightly more straight forward rules, so if you’re not willing to spend as much time doing reading and research, this could be the plan for you.

Thanks for taking the time to read about the basics of 1099 retirement plans, if there’s something you’d really like to hear more about that I haven’t mentioned in the article, let me know in the comments below!