Should I use a Solo 401(k) or a SEP IRA, and Roth or traditional?
Short answer
Most full-time creators with no employees can put away more with a Solo 401(k) than a SEP IRA, because it lets you contribute as both the employee and the employer. Roth or traditional depends on whether you'd rather save on taxes now or in retirement.
Otavio Mayole, Co-founder, DeCypher FinancialsUpdated
SEP IRA
- Only employer contributions, as a percentage of your self-employment earnings or S-Corp salary
- Simple to open and run
- Covers employees too, if you have them
Solo 401(k)
- An employee contribution plus an employer contribution, so at the same income you can usually put in much more
- Only for businesses with no employees other than you and your spouse
- A little more paperwork once the balance grows
Both have yearly limits set by the IRS. Deadlines to open and fund each one differ, and opening before December 31 keeps the most options open.
Roth or traditional
- Traditional lowers your taxes this year. You pay tax when you take the money out in retirement.
- Roth gives no deduction now, but qualified withdrawals in retirement are tax-free.
Many creators split it. In a high-income year, traditional usually saves more. In a lower year, Roth often makes sense.
The order we usually follow: emergency fund, then high-interest debt, then a Roth IRA (or a backdoor Roth at higher incomes), then your Solo 401(k) or SEP, and a regular brokerage account last.