Sep 401K

The SEP IRA and the 401K are the two most common retirement accounts chosen by successful self employed people.  There are many advantages to a SEP 401K plan. In 2009 and in 2010 the contribution limit on this plan was $49,000.  Another advantage is that they are easy to set up and require very little administrative duties. 

One downfall to the SEP 401K is there may be better tax advantages and a higher contribution limit to individuals over the age of 50.  This type of 401k does not have the $5500 “catch up” allowance for the over 50 crowd.

Individuals that can benefit from the Sep 401K plan are those that would like to contribute 25% of their W-2 earnings or 20% of their self-employment earnings to the SEP.  However, you need to consider that the IRS does not allow loans in conjunction with a SEP. If you are an individual who might need a loan in the future, this might not be a good choice for you.

One important thing to bear in mind is that you can set up a SEP IRA and convert to an Individual 401k in the future if you change your mind and either want to receive an Individual 401k loan or if you want to contribute more than the calculations of a SEP IRA will allow. Converting from a SEP IRA to an Individual 401k and transferring retirement assets from a SEP IRA to a new Individual 401k can be accomplished by completing some minor paper work.

For successful business owners, the two retirement plans that make sense are the SEP IRA and an individual 401K.  The individual 401K allows you to make more contributions at the same income level and allows you to obtain loans against the 401K.

All of these things need to be considered when you are setting up and managing your retirement account.