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Which One Is Best?  SEP IRA vs. Solo 401k

Which One Is Best? SEP IRA vs. Solo 401k

The number of self-employed Americans is rising by the day. According to Gallup, 30% of American workers were self-employed. 

Being self-employed doesn’t mean you’ll fail to benefit from the tax benefits that formal employees get as conventional retirement plans. There are two outstanding alternatives: SEP IRAs and Solo 401(k) plans. 

They both have matching advantages, but their few differences are what make one better for you. 

What is a SEP IRA?

Simplified Pension Individual Retirement Account (SEP-IRA) applies for self-employed and small business owners and employees.  It allows you to contribute to your retirement savings with your employees doing the same. 

Your contributions are tax-deductible, and your money grows without being taxed. 

How is a SEP IRA Calculated?

You can contribute to a SEP-IRA annually.  For 2020, the contribution limit is $57,000, equivalent to 25% of the employees’ compensation for the year. 

In 2021, it stands at $58,000. That means the limit on the compensation you can use is $285,000 in 2020 and goes up to $290,000 in 2021. 

What is Solo 401k?

A solo 401(k) is a 401(k) plan limited to self-employed individuals. Spouses who work for them at least on a part-time basis may be eligible to contribute as well. 

If you run a small business with an employee who is not your spouse, you may not be eligible to save for retirement in a Solo 401(k) plan. 

It lets you make the after-tax Roth contributions. You also save more at a lower cost. 

How is the Solo 401k Plan Calculated?

If you’re below 50 years, you can contribute a maximum of $57,000 in 2020. If you’re above 50 years, you can contribute a maximum of $63,000.

However, your first $19,500 can be contributed up to 100% of your compensation.  After that, the calculation is the same as a SEP IRA.  But, it can be stacked.

For example, if you earn $100,000 and under 50 years old, you can contribute $19,500 as an employee of your own company.  

In addition, you are able to contribute towards the employer portion, or profit sharing.  This is an additional $25,000 (25% of $100,000) with a total of $44,500 for 2020.

Which is the best between a SEP-IRA and Solo 401 (k)?


If you’re self-employed, Solo 401 (k) is the best option since its potential tax saving is higher. It also offers more-on par with other employer-sponsored retirement plans that SEP doesn’t offer. 

For instance, you can take out a loan from your Solo 401(k) of $50,000 and below or 50% of your account balance.  It offers catch-up contributions if you’re aged 50 and above and the Roth option. 

Roth option helps you pay income tax in exchange for withdrawals retirement that is tax-free.

If you need help finding which plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

401k 101:  What is a vesting schedule?

401k 101: What is a vesting schedule?

401k’s are a great way for employees to save up for retirement, and part of being a successful business owner is to understand how they work. 

One aspect of 401k’s you should be familiar with is “vesting”.  This article will give a brief outline of vesting and its role in your business. 

If you would like more information about vesting or any other aspect of 401k’s, the experts at lifeincrs are here to advise you.

How does vesting work?

When your employee pays into their 401k you have the option to match it, either fully or a percentage. 

Whatever an employee contributes to their 401k, of course, is theirs immediately. 

However, the employer may choose to not make their matched funds immediately available, instead requiring that an employee spend a certain amount of time at the company before they have access to them. This is known as vesting.

To say an employee is “fully vested” means they have access to all the funds their employer has put into their 401k. If an employee leaves before they’re fully vested, they will forfeit the non-vested funds.

Vesting Schedules

Often, employers will set up a schedule that allows employees to become incrementally more vested in their matched funds year by year. 

For instance, if an employer puts $5,000 into an employee’s 401k and they vest the matched funds at a rate of 20% per year of employment, they would gain access to $1,000 of matched funds every year, becoming fully vested in the fifth year.

Safe Harbor 401k’s

A Safe Harbor 401k plan is a specific kind of 401k setup that allows businesses to avoid burdensome IRS compliance tests

However, when using one of the Safe Harbor options, the employer will need to choose from pre-approved IRS matching and vesting schedules. 

This may or may not align with the company’s goals.

Consider using our Retirement Plan Evaluator to see if a Safe Harbor makes sense for your company.  Or, connect with one of our experts for a free consultation.

Why Your Employees Are Getting Money Back From Your 401k

Why Your Employees Are Getting Money Back From Your 401k

If some of your employees are receiving refunds from your company’s 401k plan, chances are your plan failed the annual IRS required compliance (nondiscrimination) tests.

Although 401k plans have emerged as one of the most popular retirement plans in the US, they still come with a complex set of rules that can limit some businesses, caused by the nondiscrimination rules.

401k refunds or corrective distribution are a headache for plan sponsors like you and employees alike.

The Why of Non-Discrimination Testing

The IRS tests on your plan provide for equal tax breaks to all participating employees, both the highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). 

Although your HCEs may be willing and able to contribute more, the IRS requires that both the HCEs and the NHCEs contribute to the 401k plan at similar rates.

There are several tests conducted on your plan. They include

  • ADP testing (actual deferral percentage) analyzes the average of your salary deferral percentages for HCEs and NHCEs
  • ACP testing (actual contribution percentages) tests employers matching contribution
  • The top-heavy test looks at the amount HCEs contribute to the plan as contrasted to everyone else

Consider using our Retirement Plan Evaluator to see if a Safe Harbor makes sense for your company.

Refund Deferrals

If your plan fails the ADP and ACP tests, take corrective action for your plan during the statutory correction period to cause the test to pass. 

You have two-and-a-half months after the end of the plan year being tested to correct excess distribution with the excess contribution distributed any time during the 12 months period of the plan. 

After the 12 months, you can correct this by making a qualified nonelective contribution to the plan for NHCEs.

Consider a Safe Harbor 401k

A safe harbor plan dispenses the need for nondiscrimination testing. They automatically pass the ADP and ACP tests when safe harbor plan requirements are met, which are certain contributions and participant notices.

There are three variations of the safe harbor plan, which require the employer to make one of the following contributions to the plan

  • Basic matching
  • Enhanced matching
  • QACA safe harbor match

Additionally, it requires that all safe harbor matching contributions be 100% vested.


If your plan fails the testing, get your plan advisor and record keeper to come up with a plan to address the problem. It’s equally crucial to consider factors beyond cost by considering a safe harbor plan for your business.

Have more questions about how to pass your annual testing requirements? Schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with Evaluator.

Safe Harbor 401(k) Plan Deadlines

Safe Harbor 401(k) Plan Deadlines

For many small business owners, establishing a Safe Harbor 401k plan is beneficial and is a choice worth looking at as it provides excellent tax and retirement benefits for both the employer and employee. 

By having a great retirement plan for your employees, you demonstrate your investment in their future, which will help you recruit and retain the best talent in the industry. 

Safe harbor deadlines are the one thing to look out for so that you don’t miss out and have to wait another year.

What’s the Purpose of a Safe Harbor 401k Plan?

As an employer, you already know that offering a 401k makes it easier for you and your employees to save more for retirement. 

The government wants to ensure everyone takes part meaningfully and benefits from the plan their employer offers.  And, as a result, the IRS has set up a series of nondiscrimination tests designed to measure whether a 401k favors ownership and highly compensated employees (HCEs).

A safe harbor 401(k) is a program designed to avoid annual nondiscrimination testing of employees’ elective contribution and employers matching contribution that’s required in a 401(k) plan.

There are two types of Safe Harbor 401(k)s; Standard Safe Harbor and QACA Safe Harbor.

Safe Harbor Deadlines

Time is of great essence when considering a safe harbor 401k plan. 

To implement a new safe harbor 401k plan, remember October 1st is the final safe harbor deadline day. 

Still, consider starting earlier than that, given you need time to send a notice of 30 days to your employees before the deadline day since you’re making a matching contribution and a few more days for initial coordination.

Essential dates when starting a new safe harbor 401k plan

  • By August 15th, set up your guidelines for safe harbor 401k.
  • By September 1st, give a 30-day notice to employees for a safe harbor matching plan
  • On October 1st, the safe harbor 401k plan is effective and exempt from nondiscrimination testing

Essential dates for an existing 401k plan

  • November 30th request the addition of a safe harbor matching provision to your existing 401k plan
  • By December 1st, send a 30-day notice to your employees
  • On January 1st, the safe harbor 401k matching takes effect and spare the plan from nondiscrimination

Is a Safe Harbor 401k Plan Right for You?

A safe harbor 401k plan is an excellent choice if your business plans to match employees’ contributions and don’t want to worry about nondiscrimination testing. 

The safe harbor 401k includes significant tax savings, and your employees will be happier. 

On the flip slide, it will increase your overall payroll depending on the amount of participation.  Small businesses should weigh the pros and cons of the safe harbor 401k before going that way.

If you need help finding which profit sharing plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

The Benefits of Auto-Enrollment

The Benefits of Auto-Enrollment

To attract the best employees, you need to have a great benefits package.  Besides offering insurance, having an employee retirement plan is an excellent incentive for retaining top talent. 

Having a retirement plan with auto-enrollment provides great benefits to both employee and employer. 

What Is Auto-Enrollment?

An auto-enrollment plan is a retirement savings plan where employees are automatically enrolled to contribute a certain amount of their salary each payday.  Unlike a regular 401k, the employee does not have to take action or agree to participate in an employer-sponsored retirement plan. 

How Automatic Enrollment Works

Automatic enrollment is a feature that can be added to new or existing retirement plans.  They include a 401k, 403b, governmental 457b, SARSEP, and SIMPLE IRA plans.

The way automatic enrollment works is that employers deduct a certain percentage from each eligible employee’s paycheck and deposit it in their retirement account.  Employees can opt-out of the automatic deduction from their salary or change the amount at any time.

Use our Evaluator to see if you’re using the right retirement plan type for your company. 

The Benefits of Auto-Enrollment for Employers

The IRS approved plan, called the automatic contribution arrangement, which means your employees are automatically enrolled in your employer-sponsored plan.  The automatic enrollment feature encourages your employees to defer their salary by default, instead of waiting to request enrollment.

Here are the advantages of automatic enrollment:

  • More employees contribute
  • Studies show that auto-enrolled employees save more over time
  • Employers are helping their employees prepare for retirement as soon as they’re eligible
  • Auto-enrollment has significant tax advantages for employers, including deductions for employer contributions (otherwise subject to tax)

Also, under the SECURE Act, the employer will enjoy an additional tax credit of $1,500 over the first three years of the plan.

Auto-Enrollment Benefits for Employees

The main benefit of auto-enrollment for employees is that it gets them to start saving. 

Automatic enrollment puts employees on the path to retirement as soon as they are eligible to join the plan.  In some instances when default investment selections are made, it can lead to larger account balances for the employee. 

Auto-enrollment benefits both employers and employees.  The employers are helping their workers prepare for retirement, and the employees are building up their savings for when they will no longer be working.

If you need help finding which profit sharing plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.

How Does Profit Sharing Work?

How Does Profit Sharing Work?

When it comes to offering retirement benefits to your employees, you have more options than just offering a 401k.  So, how does profit sharing work?

Profit sharing can be a great option for employers who want to give their employees a little extra towards retirement, help save more towards your own retirement, or would simple rather give money to their employees than the IRS.

It’s a natural way to increase loyalty, retention, and morale, as workers directly benefit from the company’s success. 

Read on to learn more about what profit sharing is and how it can benefit you and your employees. 

How Does Profit Sharing Work?

Profit-sharing is a compensation system where employees receive a percentage of their employer’s profits in addition to their regular pay and benefits, in order to help them pay for retirement. This can be offered as cash or stock options.

Unlike a 401(k), employees do not contribute to profit sharing, and it can be offered in addition or in lieu of a traditional 401(k)

Companies can choose what percentage of their profits go to a profit-sharing plan each year, though a company doesn’t necessarily have to be profitable to have one of these plans.

This means it’s a great option for employers who need flexibility and don’t want to contribute a fixed percentage to a 401(k) year after year. If you’re having a tough financial year, you don’t have to contribute to a profit-sharing plan at all.

Use our Evaluator to see if you’re using the right retirement plan type for your company. 

Types Of Profit Sharing

If you’re interested in a profit-sharing plan for your business, there are a few different options. The three most common types of profit-sharing are:

  • Pro-rata plan – this is a plan where every employee receives the same rate of employer contributions. This rate is usually based on their salary.
  • Age-weighted plan – this type of plan has contributions that are based on their age, so it tends to favor older employees.
  • New comparability plan – this type of plan lets employers divide employees into groups and set different rates for different groups. These rates can be based on factors like how long the employee has been with the company, their age, or what department they work in. 

Profit-sharing can be used by businesses of any size, and are a great tool to keep employees motivated and invested in your success.

In fact, your plan most likely already has a profit-sharing option.  However, it might not be the correct option for your company.

If you need help finding which profit sharing plan makes sense for your company, schedule a plan discussion with us or take 30 seconds to find which plan is best for your company with The Retirement Plan Evaluator.