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Which Retirement Account Should a Small Business Owner Use? SEP IRA vs. Solo 401k - YouTube
Channel: Financially Simple Business
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hey guys it's Justin good bread with
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financially simple one of the things I
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keep hearing a lot for our business
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owners is should I use a SEP IRA or a
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solo 401k or Sol okay
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in a business for this year so look
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we're in 2017 we're going through our
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tax planning we're nobody gonna sock
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some money away for our retirement where
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do we put it so let's deal with the SEP
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IRA first when should we use a SEP IRA
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well a SEP IRA is really good for last
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year because we can establish it all the
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way up until your filing date of your
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tax returns if you find an extension
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that's all we into October of this year
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the cool thing about a SEP IRA is if you
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have employees who have worked for you
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for less than three of the last five
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years you can discriminate against them
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if you have a new business and you have
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employees but then all do everybody's
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been working with you for less than
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three years a SEP IRA may be a good
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opportunity for you to use that's one
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reason why you may consider that with a
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SEP IRA you're limited to the amount
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that you can contribute to the plan so
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if you make $100,000 in income or gross
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income 20 K is the max you can put into
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the SEP IRA to make $50,000 an income I
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can put $10,000 into the SEP IRA a semi
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rate does not have Roth provision or
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Roth IRA provisions remember with the
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Roth IRA you put money into the plan
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after taxes and the money grows tax-free
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it's a cool feature but a SEP IRA does
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not allow Roth contributions the other
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thing that we can't do with a SEP IRA is
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create loans from the account so
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sometimes we work with our business
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owners and we need the provision to get
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money for tactical reasons we can't do
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that with a SEP IRA so let's switch to a
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sole okay a sole okay and in order to be
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eligible for it you can't have any
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employees one exception your spouse does
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not count as employee now there's some
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technical parameters that you need to
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work for your CF being your CPA on but
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for the most part you and your spouse
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can make contributions to a sole okay
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now remember that SEP we can only do 20%
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in it's very similar on the sole okay
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with one exception because it falls rate
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the 401 K rules
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if you're under the age of 50 you can
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make an $18,000 contribution this year
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if you're over the age of 50 you can
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make a $24,000 contribution this year
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plus we can make 20% of our profits in
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profit sharing as a contribution to the
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401 K so let's go back to our example if
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you have a hundred thousand dollars in
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profit we can put just like the set we
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can put twenty thousand dollars into the
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sole okay plus your employee
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contribution of eighteen thousand or
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twenty four thousand now remember and
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both the sole okay and the set we cannot
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contribute more than a combined of
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$54,000 this year 2017 a really neat
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feature that I like about the sole okay
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is that you can use a Roth feature in
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that your employee contribution of
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eighteen thousand if you're under fifty
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or twenty four thousand if you're over
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fifty can go in as a Roth contribution
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and it can grow tax-free from this point
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forward and then we use distribution you
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could take the money out tax-free that
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is not available on the SEP IRA the
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other thing that we can use on a sole
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okay is we can create a loan program so
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if I'm working with a business owner
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that we're gonna make some tactical
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business planning moves on I may want to
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use a loan from their retirement plan
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notice I use the word may want to use
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alone however just having the option on
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the sole okay give him one more tactical
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move on planning that a SEP IRA doesn't
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allow when it goes down to it most of us
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make our decision on cost few years ago
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a soul okay was really expensive to set
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up you'd have to pay a third-party
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administrator to file the reports to the
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IRS now as time has moved on these plans
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have become more popular they're about
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equal in cost so today there are pros
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for using a SEP their approach for using
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a soul okay your particular situation
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will dictate which way you go that's
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where you need to meet with your CFP
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your certified financial planner and
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your CPA between the two of those
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professionals they can run the tax
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verifications look at all the pros and
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cons and all the nuances and see if it
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works what works best for your
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particular situation but I put a huge
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blog post in place on our boat website
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financially
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while they go through all the details
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that comparing a SEP IRA it's so ok a
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simple a 401k kind of compares them all
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maybe you have additional questions I
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have it covered check it out that's a
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great blog post we're gonna put it in
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the show notes here below us this is
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just in good bread signing off on
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financially simple let's continue to
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make your life financially simple
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