How can I choose between SEP IRA and 401K?

among the more popular choices of pension savings tax plans, which are available for self -employed Americans, are a simplified pension pension account (SEP IRA) and solo plan 401K. Selection between SEP IRA and 401K is a matter of understanding the benefits and features of both plans and human circumstances. It seems that the comparison of these two suggests that the solo plan of 401K is more convenient, but each plan is associated with multiple functions and benefits that blur the problem. For example, although SEP IRA and plan 401k have the same tax advantages, the IRA SEP is less expensive, but 401K allows somewhat larger contributions for the same level of income.

SEP IRA is a simple account to be opened on most financial institutions. The costs are low and investment opportunities are the same as traditional - shares, bonds, mutual funds, etc. The main difference between IRA SEP and traditional IRA is the amount of the contribution. For example, in 2010The workers under the age of 50 could contribute 100% of their taxable income to their IRA accounts, up to a limit of $ 5,000 (USD), while up to 25% of their income, up to $ 49,000, could contribute up to 25% of their income. The highly complex and confusing rules of the Internal Revenue Service (IRS) make the accurate calculation of the permissible contribution a matter of a special calculator; For one thing, the amount of the contribution is based on the overall taxable income less contribution.

Special 401K plan for self-employed was introduced in 2001 and is commonly called individual 401K, solo 401K or "Solo-K". More expensive for establishment and maintenance than SEP IRA is limited to businesses consisting exclusively of the owner or owner and husband. Like the IRA SEP, the maximum Annub AL for the solo plan 401K is $ 49,000 for 2010, much higher than the limit for traditional plans of 401k sponsored by employers; Unlike SEP IRA, these age 50 or more are allowed by paying "catching up", limited to 2010 Zand $ 5,500. IRS allows solo 401K plans a wide range of investment options, although most funds that manage solo plans 401K limit the investment opportunities available to their clients. Solo 401K owners with specific investment plans for their funds should ensure that their depository is ready for these investments.

SEP IRA and plan 401k, then have many similarities; They also have some significant differences. Taxes from contributions to SEP IRA and 401K and their earnings are postponed until they are paid, and both will create significant tax sanctions for any amount collected before 59½ age. The limits of the contributions are basically the same for those who are under 50 years of age, and far beyond the limits of the impact impact on the traditional IRA and 401K plans. IRA SEP plans are much less expensive to set up and maintenance than solo plans 401k. However, SEP IRA owners do not have to borrow against these funds; Solo plan owners can borrow up to 50% of their funds, without tax,with a limitation of $ 50,000. This is a significant difference, especially for those whose businesses reflect the overall economy and sometimes find themselves problems with cash flows.