i401k or SEP IRA: An extra $54,000 in tax advantaged retirement accounts a year

i401k or SEP IRA: An extra $54,000 in tax advantaged retirement accounts a year

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If you’re self-employed or have a side hustle, you have the best retirement accounts available to you. Have you ever wondered if an i401k or SEP IRA was better?

A normal 401k has a contribution limit of $18,000, with an additional $6,000 in catch-up contributions if you’re 50 and older for the year of 2017. For an IRA, your maximum contribution is $5,500, with an additional $1,000 catch-up contribution if you’re 50 and older.

For the long-term, I’d recommend a Individual 401k (i401k), with one small exception. If you just started your business last year, and forgot to put any money in a retirement account, the SEP IRA allows you to open your account up to the day you file your taxes (and that includes up to extension days, not just the April deadline!). The Individual 401k account needs to be opened by the last day of the year for you to contribute.


For a SEP IRA, you must put equal percentages into every members IRA, which can get quite expensive fast. If you have employees and you open a SEP IRA and start putting in 10 percent of your own salary, keep in mind that you’ll have to put in 10 percent of all your employees salaries into their own IRAs as well! I could see this being a benefit for families who just want to distribute to retirement accounts easily. Plus, if your kids work in the business, they are exempt from FICA taxes!


When my i401k assets grow above $250,000, I am required to file form 5500 EZ. Don’t forget to file or the penalty is pretty severe! It doesn’t look like a lot of i401k custodians file for you, so you’ll need to ask your CPA. I wouldn’t try to file it myself, as government paperwork is usually pretty nitpicky and the fine is quite large.

Individual 401k vs. SEP IRA

The i401k allows for catch up contributions, for people who are age 50 and older, but the SEP IRA does not.

The SEP IRA limits you to 20 percent of your business income, which is defined as all the profits minus half of the FICA taxes, if you are NOT a C or S corp. Ie, if you are a partnership, single-member LLC, or sole proprietorship, you are limited to 20 percent of your business income. If my LLC is elected as a corporation, I am allowed to put 25 percent of my W-2 wages into the retirement account.

FICA taxes include social security of 6.2 percent up to $128k,400 (2018) and medicare tax of 1.45 percent on the first $200,000, and 2.35 percent above that. The i401k allows for you to put in $18,000 plus 20 or 25 percent of your business income depending on which type of corporation structure you have elected (same corp rules as SEP IRA). Both of them are capped at the same amount, which is $54,000 for 2017.

This makes the i401k much better in terms of reaching the max on your contribution. If you only made $18,000 this year doing a side hustle, which is a pretty reasonable place to start, then you’d be able to contribute nearly all of your salary to the i401k (minus FICA). If you opened a SEP IRA, you’d only be able to contribute 1/4 of that.

What if you’re looking for a loan, you can only get one against the i401k for a maximum of $50,000 or 50 percent of the assets of the account, whichever is smaller.

Generally a SEP IRA is a tiny bit easier to set up as it takes less than 5 minutes. It also doesn’t require the 5500 EZ form when your assets reach above $250,000. I would argue that benefit isn’t really worth it compared to all the other things the i401k offers. This includes loan option, catch-up contributions for when you’re 50 and older, and higher contributions at lower salary levels. The i401k requires more than 5 minutes, but you’re still just typing things into an online form. The cost in dollars to open both is the same.

For most people starting a side-hustle, you’re better off opening an i401k. This is because your side hustle income might start out around $20,000 so you can put more into the i401k.

I’ll review the companies I looked at for i401ks and SEP IRAs in my next post. Subscribe to stay updated!

*2018 caps are $55,000, with a $6,000 catch up contribution for those age 50 and older.

Author: Olivia

Olivia worked in finance and wants you to learn the secrets of financial independence. She believes there are so many ways to monetize your life and make money doing the things you're already doing because so many companies offer free money.

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