Author Topic: Self Employed: Choosing Between Solo 401k and SEP IRA, AND Roth/Traditional  (Read 502 times)


  • 5 O'Clock Shadow
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  • Posts: 59
I want to open a second retirement account (in addition to existing Roth IRA). I've done a lot of research but my head is still spinning...

Some basics:
- 25 years old
- Self employed, freelance income
- Expected income of $50-$60k this year
- Hoping to increase to 60-75k next year, but definitely variable
- Already maxing Roth IRA
- Only other accounts are taxable (~20k that I may wish to transfer over to a tax advantaged account)
- No employees now, but possibility of employees within the next 5 years

I'm trying to decide between a Solo 401k (in which case I'd probably go ROTH), and a SEP IRA (which, as I understand it, has to be traditional?)

The solo 401k has the obvious benefit of larger contribution limits, availability in both roth and traditional, etc. However, I aspire to expand my business which may involve employees one day, and I've read that Solo 401k's are tricky when transitioning from a solo operation to a business with employees. I also don't want a retirement account to hold me back from hiring employees if it otherwise makes sense for business.

So, that's my first dilemma.

The other is the age-old Roth vs Traditional.

Even at an income of $60k, the new 20% pass through income deduction results in a taxable income of ~$36k after the standard deduction. That puts me in the 12% bracket. I can't imagine I'll be paying less than that in retirement, which kinda makes me want to just sock away as much Roth funds now while I'm in a relatively low income bracket. Also, I have money in a taxable account which I paid very little tax on, which could be thrown into a Roth over time. The bulk of my tax liability at this time is self employment tax, which cannot be reduced by any retirement contributions as far as I know.

Any thoughts/advice? Much appreciated!
« Last Edit: May 13, 2018, 09:58:14 PM by FreelanceToFreedom »


  • Bristles
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  • Posts: 317
Do you see income changing significantly (do you want to go and if yes to what limits)? do you want/willing to pay for the flexibility and control that solo401k plan provides?

otherwise, you are mixing up two different things
- choice of plans for your business
- specific distribution between pre-tax/Roth/after-tax which is specific to any given tax year

For myself, my answers were
- I do not want employees (it is my wife and myself, in what IRS designates qualified business partnership)
- my earnings vary depending on the projects taken and are put me between 100-200k a year, a little less in a future since I have also taken a W2 commitment.
- solo 401k plan ( is my provider) gives me everything I want , including ability to set aside 110k a year (my spouse and myself 55k each). gives me ability to play with tax rates varying completely how much I contribute to what bucket. all leftover space up to 55k limit becomes post tax non Roth (plan allows) which rolls over into Roth without tax consequences (mega backdoor roth).  This is very valuable to us

regarding 'holding you back' - wouldn't this be tail wagging the dog? if you get to the point where you must have help (employees), you will evaluate and either modify or terminate whatever plan you had at that point
« Last Edit: May 14, 2018, 06:43:09 AM by MidWestLove »