Is a SEP the right tool?

[vivsavage]

Hi -

My wife has her own business with no employees, and after nearly a year in business things are working out well.  She is looking to set up a retirement account and was interested in the SEP IRA option, possibly at Betterment or Vanguard.  This post is looking for information regarding the ins and outs of the SEP option.  Would love to hear from those of you who are using it and why you made that choice.  Thanks

[Telecaster]

Self-employed 401(k) is better due to higher contribution limits.    Downsides are fairly minor. 

[AdrianC]

I’ll second the 401k recommendation. I’ve got both. The SEP is fine if you’re maxing it out. The 401 is better when income is lower.

My 401k is with fidelity. It’s been fine.

[vivsavage]

Thanks for the replies - I read the following on Betterment, and wonder if in your experience the amount of work for the 401k is greater and or more confusing than the SEP. 

You might be wondering why anyone would do anything but the Solo 401(k).

Here is why: First, setting up an individual 401(k) typically requires more advance planning and paperwork than opening a SEP or SIMPLE IRA (either can usually be done online in just a few minutes). In addition, individual 401(k) plans require you to file Form 5500-EZ with the IRS every year once the plan reaches $250,000 in assets. And of course, with the solo 401(k) you have to be your own company with no employees.

Also - If you knew now that in 3 years she would hire an employee, how might that affect the choice?

Thanks

[Telecaster]

Thanks for the replies - I read the following on Betterment, and wonder if in your experience the amount of work for the 401k is greater and or more confusing than the SEP. 

You might be wondering why anyone would do anything but the Solo 401(k).

Here is why: First, setting up an individual 401(k) typically requires more advance planning and paperwork than opening a SEP or SIMPLE IRA (either can usually be done online in just a few minutes). In addition, individual 401(k) plans require you to file Form 5500-EZ with the IRS every year once the plan reaches $250,000 in assets. And of course, with the solo 401(k) you have to be your own company with no employees.

Also - If you knew now that in 3 years she would hire an employee, how might that affect the choice?

Thanks

Betterment is a rip-off, IMO.  First thing to do is put those guys in the rear view mirror.

But that aside, an individual 401(k) can save you literally thousands of dollars a year in taxes.  Would you spend 20 minutes one time to save a thousand bucks every year? I would. 

And here's form 5500-EZ:

https://www.irs.gov/pub/irs-pdf/f5500ez.pdf

For a solo 401(k) it might take you three whole minutes to fill out.

[trollwithamustache]

look into the fees and longer term, the reporting requirements on the 401k. There is a threshold at something like 250k were with you have to do more work. And since you are posting on this forum, I'm figuring there is a decent chance you guys can hit that threshold after a bit :)