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I run my own business. What retirement savings option is best for someone self-employed, a Simplified Employee Pension (SEP) or a solo 401(k) plan?


SEP and 401(k) plans have similar purposes and rules, but a 401(k) offers more flexibility and more complexity to go with it. The better choice for you depends on whether you employ anyone else, other than your spouse. Because you specified a “solo 401(k),” I’ll assume you have no other employees. The advantage of a 401(k) is that it gives you two ways to win. The maximum contribution for 2014 under a SEP is 25 percent of net earnings (really 20 percent of gross salary because the 25 percent is calculated on whatever is left after the deduction is made) or $52,000, whichever is less. That’s also the maximum that’s tax deferred. You can deduct your contributions on your tax return and pay up when you retire and start withdrawing the money.

-Conrad de Aenlle