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  1. #1
    Full Member Zdig's Avatar
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    SEP-IRA VS. SEP-401k
    Since it's close to tax time... does anyone prefer a SEP-IRA to a SEP-401k (or the other way around)

    As I understand them, an SEP-IRA is much easier to maintain and is much lighter on paperwork/regulations etc... but an SEP-401k allows you to save much more money tax free. I'm fairly new to both of these...any thoughts? I'm leaning towards the SEP-IRA based on my research, but I think the SEP-401k might be worth the extra hassle if I can protect a higher % of my income from taxes.

  2. #2
    Moderator MichaelColey's Avatar
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    Great post! I had never heard of the SEP-401k.

    It looks like they have the same maximums: $42,000 for 2005 and $44,000 for 2006. If you earned more than $210,000 from your business in 2005 or will earn more than $220,000 in 2006, there is essentially no difference.

    The difference between the two is that the SEP-IRA has a limit of 25% of income (actually 20%, since the amount you contribute is no longer considered income), while the SEP-401k has the same limits plus you can contribute up to an additional $15,000 ($20,000 if you're 50 or over).

    Are you really able to save more than 20% of your income? If so, that's fantastic. Very few people can do that.

    Another difference is that you can't have employees with the SEP-401k, while you can with the SEP-IRA. If you have employees or plan on hiring employees, that could be a deciding factor.
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  3. #3
    Lite On The Do, Heavy On The Nuts Donuts's Avatar
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    Is the SEP-401k you're referring to, the same thing as a "Solo 401K" (which I'm leaning towards setting up).

    "Solo 401k" info:
    http://retireplan.about.com/od/401ks.../solo_401k.htm

  4. #4
    Moderator MichaelColey's Avatar
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    It looks like the same thing to me.

    It was created in 2002, which would explain why I didn't hear about it. I've been doing my SEP-IRA longer than that, and haven't researched the alternatives since I started with my SEP-IRA.

    Hmmm....

    No tax returns for the plan are necessary, as long as assets remain under $100,000. If assets exceed $100,000, a simplified tax return may be filed.
    Also...
    The employer contribution portion is not subject to FICA (Social Security) or self-employment taxes (but any salary deferral portion is subject to tax).
    For those earning over $210,000, the maximum is the same for either plan, so an SEP-IRA is fine.
    Michael Coley
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  5. #5
    Full Member Zdig's Avatar
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    Quote Originally Posted by MichaelColey

    The difference between the two is that the SEP-IRA has a limit of 25% of income (actually 20%, since the amount you contribute is no longer considered income), while the SEP-401k has the same limits plus you can contribute up to an additional $15,000 ($20,000 if you're 50 or over).

    so the SEP-401k allows you to stash away a max total $42,000 + $15,000 for 2005, correct? it seems like the SEP-401k allows you to save much more from being taxed?

  6. #6
    Full Member Zdig's Avatar
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    Quote Originally Posted by MichaelColey
    It looks like the same thing to me.

    It was created in 2002, which would explain why I didn't hear about it. I've been doing my SEP-IRA longer than that, and haven't researched the alternatives since I started with my SEP-IRA.
    I think you can roll your SEP-IRA into a SEP-401k if you choose to switch

  7. #7
    Full Member Zdig's Avatar
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    Quote Originally Posted by MichaelColey

    Are you really able to save more than 20% of your income? If so, that's fantastic. Very few people can do that.
    I'm not sure yet, but I'm trying to figure out what the max is, so I have something to shoot for. : )

  8. #8
    Moderator MichaelColey's Avatar
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    Quote Originally Posted by Zdig
    so the SEP-401k allows you to stash away a max total $42,000 + $15,000 for 2005, correct? it seems like the SEP-401k allows you to save much more from being taxed?
    No, if I'm reading it right, they both have a maximum of $42,000 for 2005. The difference is the percentage cap is effectively 20% on the SEP-IRA while the SEP-401k allows you to put in 20% + up to an additional $15,000 (still with a $42,000 total maximum and no more than 100% of your income).
    Michael Coley
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  9. #9
    Full Member Zdig's Avatar
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    SEP-401k
    did u see that comparison table on the SEP-401k link i posted?

    "How a Self-Employed 401(k) contribution can add up
    As you can see from the example below, a self-employed business owner who is age 50 with $100,000 in compensation may save up to $20,000 more with a Self-Employed 401(k) than with a SEP-IRA or Profit Sharing Plan."

  10. #10
    Moderator MichaelColey's Avatar
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    It's only up to $20,000 more if you're over 50. Otherwise, it's up to $15,000 more. And if you make between $135,000 and $210,000, the difference is even less. Once you're at or above $210,000 (for 2005), they both have the same limit: $42,000.
    Michael Coley
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  11. #11
    Prince of Content Vinny O'Hare's Avatar
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    This is a good reason to start a business even if you are only going to employ yourself.
    Vinny O'Hare - OPM - Contact Info email: vinny at teamloxly.com ~ 702-582-6742 Twitter

  12. #12
    Full Member Zdig's Avatar
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    Quote Originally Posted by nyfalcon
    This is a good reason to start a business even if you are only going to employ yourself.
    good point, this is yet another excellent reason to have your own business

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