By Stephen W. Bedikian, Associate Wealth Advisor
Choosing the Right Retirement Plan
It may seem counterintuitive, but if you’re self-employed, a Self-Employed IRA (SEP IRA) isn’t always the best retirement plan choice. For many, when they decide to start working for themselves, choosing a retirement plan isn’t on their high-priority list. They may just open a SEP IRA because it’s easy to do and seems like the right choice because of its name.
This can be an expensive mistake. The potential tax savings associated with a Solo 401k (aka Uni-K) can add up over multiple years.
What’s a Solo 401k?
It’s essentially a 401k that’s limited to a business owner and their spouse (if they are a compensated employee).
There are several factors to consider to determine the right choice of retirement plans for your business:
- Expected employees. If you expect your business to hire other employees beyond your spouse, then a Solo 401k isn’t the right choice for you. If you’re going to be a consultant, accountant, freelancer or other solo service provider, then the Solo 401k may be your better option.
- Fees. Opening a Solo 401k is a fairly straightforward process, particularly for those of our clients who already hold custodial accounts with Fidelity or Schwab. If you want to look elsewhere, other custodians may charge an initial setup fee and an annual fee for a Solo 401k, but you can shop around. Fidelity and Schwab are currently waving all fees for new. There may be annual fees for a SEP IRA but they’re usually nominal. Vanguard currently charges a $25 annual fee.
- Filing requirements. The IRS requires an annual filing once Solo 401k plan assets exceed $250,000; that’s probably not something to be concerned about for a number of years after you establish a plan. There are no filing requirements for a SEP IRA.
- Business structure. If your business is not incorporated, you have to factor in self-employment payroll taxes and deduct employer contributions from compensation, so this may effectively reduce your potential contribution amount. That’s a potential incentive for establishing an S Corp or LLC for your business in addition to liability protection.
So what’s the advantage of a Solo 401k vs. a SEP IRA?
With a Solo 401k plan, you can make retirement contributions as both the “employer” and the “employee”. Contrast this with SEP IRAs where only the employer can make contributions. Under both plans, the employer contribution is limited to 25% of employee compensation.
The key advantage with Solo 401k plans is that the business owner can also make contributions as an employee with limits similar to a traditional 401k plan. For 2026, Solo 401k contribution limits are $24,500, plus $8,000 in catch-up contributions if you’re over age 50.
Here’s an example: If you’re a solo freelancer and generate $100,000 in income, for both options, the maximum employer contribution is 25%, or $25,000. However, for a Solo 401k, the business owner can also make an employee contribution of $24,500 for a total of $49,500. If your family is in the 24% federal tax bracket, that means you could pay $5,880 less in taxes for that contribution year because you’ve deferred taxes on that extra employee contribution.
Obviously, these kinds of savings are only available if you’re financially in a position to make large retirement contributions. This tends to be optimal if your spouse has a different source of employment income or your business generates enough income that you can cover your living expenses even after making large retirement contributions.
Retirement contribution tax considerations for high earners
The maximum annual 401k contribution limit for 2026 is $72,000, or $80,000 if you’re over age 50. So if your employee compensation is over $288,000, there is no tax advantage for a Solo 401k because you could contribute 25%, or $72,000, via just an employer contribution for a SEP IRA.
That said, if you’d prefer to make retirement contributions to a Roth account, this is typically easier with a Roth Solo 401k, as that option is more widely available. A Roth SEP IRA is allowed under the Secure 2.0 Act, but few custodians currently offer that option.
Get in touch with your fiduciary advisory team to talk through your options
If you’re planning to start a business or become self-employed, talk with your Halbert Hargrove advisor to help determine the best retirement plan for you. Planning for retirement can feel overwhelming. If you are considering working with a new fiduciary financial advisor, contact us today!
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