SEPs vs. 401(k)s
There are advantages and limits for employers who choose to offer Self-Employed IRAs (SEPs) instead of 401(k)s. But what are they, and in what cases should they choose one over the other? Our forum members weighed in.
First of all, any business may establish a 401(k) plan, but only self-employed individuals, business owners, or individuals who earn more than $550 in self-employed income may establish an SEP.
An SEP IRA is employer contributions only, and the benefits are that they are easy to set up and maintain, with less paperwork, and with flexible annual funding requirements.
A 401(k) is funded by salary deferral and employer contributions, with the possibility of employer profit-sharing. Key benefits include a salary deferral plan with higher contribution limits, Roth accounts, loans, and deferred vesting available.
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