SEP IRA vs. 401(k) for Self-Employed: Which Retirement Plan is Best?

If you are self employed and want to invest in your retirement, you have to choose between SEP IRA or 401k plans. Both of these retirement accounts have different advantages. As long as you have no employees, you should be able to choose between them without having to take others into consideration.

Choosing the SEP IRA

The SEP IRA is a tax-deductible savings account that also has tax-deferred growth. It is very easy to establish and you only need a minimal amount of paperwork. The SEP-IRA has a contribution limit of $44,000, or 25 percent of your wages. If you want a simplified self-employed fund, then the SEP-IRA is an excellent choice for your retirement.

Choosing the 401k

The self-employed 401k has very similar tax advantages, but there is much more paperwork. Also, these types of plans are not as widely available. You may also find that your contributions are capped. There is also a contribution limit of 25 percent of compensation, plus any tax-deductible deferrals, up to $15,000. This is the best retirement system for people who are not making a great deal of income. It allows the greatest tax advantages.