It can be tough trying to figure out which type of retirement account is best for you if you are a small business owner or independent contractor. There are numerous subtleties between each one that can be easily overlooked. Making the wrong decision for your situation can literally cost you your retirement. Therefore, it is incredibly important that you do diligent research on each of the two types of main retirement accounts for individual business owners. The two main types of retirement accounts are listed below as well as the features that each one offers. In most situations going with an individual 401k is by far the best option and for numerous different reasons.
Features of an Individual 401k
- annual contribution limit $50,000.00
- higher administrative fees
- special catch up provision
- borrow against the account up to 50% of its value
Annual contribution limit $50,000.00
An individual 401k carries an annual contribution limit of $50,000. This will go up year after year with a growing economy. However, in special situations you can contribute even more to this retirement account. I will get to that later in the article.
Higher administrative fees
One drawback of individual 401(k)s is they sometimes come with higher administrative fees. They come with higher administrative fees because of the numerous advantages that they offer over individual IRAs or SEP IRAs. However, these fees can be cut down with careful management strategies. There are numerous management strategies that can be used to minimize these fees.
Special catch up provision
The greatest aspect or benefit of an individual 401k is the special catch-up provision. This special catch-up provision is made for people who start saving for retirement later in life. While it is highly recommended to start saving up for retirement at an early age the bottom line is few people do. Therefore, the special provision catch-up in individual 401(k)s was created for this very reason. With an individual 401(k) you can add an additional $5500 per year above the standard $50,000 annual limit. With an individual IRA you do not have this option.
Borrow against the account up to 50% of its value
Another major difference between a solo 401(k) and a Solo IRA is that you can borrow against a Solo 401(k). With a Solo 401(k) you can borrow up to 50% of the account value in credit.
Features of an SEP IRA
- annual contribution limit of $50,000.00
- lower administrative fees
- no catch up provision
Annual contribution limit of $50,000.00
An individual IRA carries the same annual contribution limit of $50,000 as an individual 401k does. When it comes to this aspect there is literally no difference between the two until you hit the age of 50 where special provision catch up comes into play.
Lower administrative fees
Individual IRAs carry very low administrative fees and this is the real selling point. This is really the only advantage that they carry over solo 401(k)s. However, in many situations you’re better off going with the Solo 401(k) as these fees can be managed very easily and minimized with type of account.
No catch up provision
The biggest drawback of a Solo IRA is that there is no catch a provision which is the age of 50. Therefore, if you started saving for retirement late you definitely want to avoid this type of retirement vehicle. The additional $5500 that you can contribute past age 50 with a Solo 401(k) can mean the difference between retiring at all. This is something should be given huge weight when deciding which one suits your situation best. The proper decision will rest on numerous facts though.
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