Have You Outgrown Your SEP-IRA or Individual 401(k)?

Markets, interest rates and future returns are uncertain.  Investors need to take steps to ensure that they control the factors in their financial lives that they are able to control.

One such factor is choosing (and funding) the retirement plan that can best maximize tax savings.  For high-income individuals who operate independently, there are basically three choices:  a SEP-IRA, an Individual 401(k) and a defined benefit pension plan.

One of these plans is likely optimal for a given person’s situation.  If the wrong plan is chosen, thousands of dollars in taxes will be needlessly paid out of your potential nest egg to the IRS—each year!  It’s important to choose wisely.

Here are the contribution limits for 2015 for each type of plan. 

Here are the main pros and cons of each type of plan.  There’s obviously much more to each plan, but these are good starting points to consider. 

SEP-IRA

  • Pro:  Takes 10 minutes to set up.  Easy to administer.
  • Con:  Because contributions are limited to 25% of income, someone with a lower income will not be able to come close to the $52,000 limit. 

Individual 401(k)

  • Pro:  Good for owner-only businesses.  In majority of cases will permit business owners to contribute a higher percentage of their income to the 401(k) than they would be able to with a SEP-IRA.  For example, a real estate agent earning $100,000 will be able to make a higher tax-deferred contribution to an Individual 401(k) than to a SEP-IRA
  • Con:  Takes more paperwork to set up and administer and requires more detailed record keeping than a SEP-IRA.

Defined Benefit Plans (DB Plans)

  • Pro:  Massive annual tax savings potential.  Because these plans have the highest potential tax-deferred contributions, owners of DB plans can shave thousands off their taxes and build a large retirement nest egg in a very short amount of time.  Plan owners can accumulate as much as $1,000,000 to $2,000,000 in a tax-deferred retirement account in just 5-10 years.  
  • Con:  Set-up and annual administration is more costly than with a SEP-IRA or Individual 401(k).  (These costs, however, will be more than offset by the resulting tax savings…)  Also, defined benefit plans are much more of a commitment than the other two options above, which both have optional contributions.

Complimentary Tax Savings Analysis

Interested in learning how much you might be able to save in 2015 taxes? Take 2 minutes to fill out our short Tax Savings Analyzer here and we will contact you quickly with the results. The deadline to establish a DB Plan for 2015 is December 31, 2015.

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