Cardinal Point Wealth Management Provides Guidance for Business Owners on Choosing Between a SEP IRA and a Solo 401(k)

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Scottsdale, AZ - April 7, 2025 - Cardinal Point Wealth Management is offering professional insights to help sole proprietors and small business owners navigate the critical decision of selecting the right retirement plan for their needs. Two popular choices, the Simplified Employee Pension (SEP) IRA and the Solo 401(k), each offer distinct advantages and considerations. The firm's comprehensive approach provides the necessary information for individuals to make informed decisions that align with their financial goals.

Contribution Limits

SEP IRA

The SEP IRA allows employers to contribute up to 25% of an employee's compensation, or a maximum of $69,000 for 2024, whichever is less. This plan is often favored by business owners seeking a straightforward way to maximize contributions without navigating complex rules. One key aspect to note is that a SEP IRA must be offered to all eligible employees; however, employees themselves do not make contributions to the plan. The employer is solely responsible for funding the account.

Solo 401(k)

A Solo 401(k) permits both employee and employer contributions, allowing individuals to contribute at higher levels. In 2024, the maximum employee contribution is $23,000 (rising to $30,500 for those age 50 and older), while the employer can contribute an additional 25% of compensation. This combination can result in a total limit of $69,000-or $76,500 for individuals aged 50 or older. Because of the dual contributions, Solo 401(k) plans often enable higher overall retirement savings than SEP IRAs. Unlike a SEP IRA, a Solo 401(k) is exclusively for self-employed individuals or business owners with no employees.

Flexibility and Control

SEP IRA

One of the defining traits of a SEP IRA is its simplicity. It is relatively easy to set up and requires minimal ongoing administrative work, appealing to those who prefer a more hands-off approach. Employers are not obligated to make contributions every year, allowing them to adjust contributions based on annual cash flow and business performance. Although there is no avenue for employee contributions, individuals can still contribute to a separate IRA or Roth IRA independently.

Solo 401(k)

In contrast, the Solo 401(k) offers additional features. One of its most significant advantages is the potential to borrow from the account, up to 50% of the vested balance, capped at $50,000. This loan provision can provide a source of emergency funds. Another benefit is the availability of a Roth option, enabling after-tax contributions that grow tax-free-a form of tax diversification. However, these added features come with added responsibilities and recordkeeping.

Administrative Complexity

SEP IRA

A SEP IRA is generally simpler to administer. With no annual filing requirements for the employer, owners benefit from minimal documentation and fewer regulatory hurdles. This plan structure is ideal for individuals who prioritize ease of management over the enhanced features available with other plans.

Solo 401(k)

A Solo 401(k) involves greater administrative obligations. If plan assets exceed $250,000, the owner must file Form 5500 with the IRS each year. In addition, the process of managing loan provisions, Roth accounts, and contribution limits necessitates more detailed recordkeeping and compliance checks. Business owners who prefer additional flexibility must be prepared to handle these administrative tasks.

Tax Considerations

SEP IRA

All contributions to a SEP IRA are made on a pre-tax basis, offering tax-deferred growth. Contributions are tax-deductible for the business, and investments grow without immediate taxation. However, there is no Roth component, meaning withdrawals in retirement are taxed as ordinary income.

Solo 401(k)

For individuals seeking tax flexibility, a Solo 401(k) can be advantageous. Contributors can choose between pre-tax deductions or Roth (after-tax) contributions, providing a valuable opportunity for tax planning. Higher-earning business owners may especially benefit from combining these contributions to optimize their overall tax strategy.

Which Plan Is Right for You?

A SEP IRA is often ideal for those who value a straightforward approach and do not require employee contributions or loan provisions. It suits individuals whose income may fluctuate, as they can adjust contributions each year based on profitability.

A Solo 401(k), on the other hand, is typically best for business owners seeking higher contribution limits and more features, including loans and Roth contributions. Those willing to manage added administrative tasks might find that this plan aligns well with goals and the desire for maximum retirement savings.

About Cardinal Point Wealth Management

Cardinal Point Wealth Management [https://cardinalpointwealth.com/] is an independent financial services firm dedicated to providing cross-border financial planning [https://cardinalpointwealth.com/cross-border-financial-planning/], investment management, and tax planning solutions. With a focus on delivering tailored advice to meet diverse financial objectives, Cardinal Point's team of advisors works collaboratively with clients to create strategies that address the complexities of managing wealth across international boundaries. The firm's mission is to help clients navigate life transitions and financial challenges with confidence and clarity.

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Company Name: Cardinal Point Wealth Management, ULC
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