Which is Best: SEP IRA or Solo 401(k)? [EPISODE #245]

by | Mar 1, 2017

Previous Episode of Self Directed Investor Talk     Subscribe to Self Directed Investor Talk     Next Episode of Self Directed Investor Talk

Which is Best: SEP IRA or Solo 401(k)? [EPISODE #245]

by | Mar 1, 2017

The Big Idea

Self-employed investors have retirement account options that are FAR superior to conventionally employed people in the form of the SEP IRA and the Solo 401k.  One of them is clearly better than the other...

Points To Ponder

  • IRA's are great, but you can't contribute more than $6,500 per year to them
  • Self-employed investors may qualify for the SEP IRA or the Solo 401k, both of which have a much larger limit - up to $60,000 per year
  • Solo 401k is practically always a far superior alternative to the SEP IRA because:
    • It's much easier to actually contribute to the solo 401k than to the SEP IRA
    • You can't have a SEP IRA that's taxed as a Roth account
    • The SEP IRA has all of the severe vulnerabilities to prohibited transactions that are present with all IRA's.  Solo 401k's are much safer and friendlier to the investor.
  • If your advisor recommends a SEP IRA over a solo 401k, they're likely either ignorant or are being compensated to motivate you to open an IRA.


Full Transcript

Listen up, you self-employed people.  If you’ve ever wondered:  What’s right for me:  A SEP IRA or a Solo 401(k)… I’ve got the CRYSTAL-CLEAR answer for you right now.  I’m Bryan Ellis.  This is Episode #245 of Self Directed Investor Talk.


Hello, SDI Nation!  Welcome to the podcast of record for savvy self-directed investors like you!  This is the show where the BEST stock is the one you liquidate so you can buy into REAL assets; this is the show where the only GOOD tax is the one you don’t pay; this is the show where we agree with Warren Buffet’s assessment that diversification is for the IGNORANT!

Yes, yes, yes… Buffett absolutely did say that.  If you’d like to see the actual quote and context, stop by today’s show notes page at SDITalk.com/245 for that link… and for plenty of other EXTRAORDINARY resources you’ll absolutely love.

Quick question, folks:  Do you want to have access to from $50,000 to $250,000 of cash credit for which you pay – say it with me – ZERO INTEREST?  Then check out SDITalk.com/credit for a free webinar training that will tell you precisely how to make that happen.  SDITalk.com/credit.

Ok… you people know good and well that we are believers in TAKING CONTROL of your investing… particularly your retirement investing… and self-directed retirement accounts like IRA’s and 401k’s are extraordinarily useful for that.

But you people who are self-employed face an additional choice, and I regret to say that it’s one most of you get WRONG, because you’re getting advice from people who are either uninformed or have conflicts of interest.

So yes, I, as the SUPREME LEADER of the Self Directed Investor movement in America, will get you back on the straight and narrow.

A typical IRA – whether Traditional or Roth – has an annual contribution limit of $5,500 or $6,500 for 2017, depending on whether you’re under age 50 or not.

Let’s be honest… that’s helpful but kinda pathetic.  It really needs to be much higher.

But for you self-employed people, it can be much higher, either by using the SEP IRA or by using the Self-Directed – aka “Solo” – 401k.  Nearly 10X higher, in fact.  For both of those plans, the limits are $54,000 per year – or $60,000 per year if you’re at least 50 years old.

Big difference.  MASSIVE difference.  I’ll put it to you like this:  One of our favorite markets for lower-priced turnkey cash flow houses is Birmingham, Alabama, where you can actually buy an entire fully-renovated turnkey rental property and still have money left over by simply making the maximum contribution to a SEP or Solo 401k for a single year!

That’s huge.

But then you have to wonder:  If you could do either the SEP or the 401k, which is better?  Surely the SEP is better sometimes and the Solo 401k is better sometimes, right?


The only time the SEP might be preferable is if you’re investing ONLY in conventional highly liquid assets, like stocks or mutual funds.

But if you’re investing in real estate or ANYTHING that could be described as an “alternative” asset, the solo 401k is better, period.

Well, that’s all I’ve got for you today, thanks for listening…

Or wait… did you want to know WHY the SEP IRA doesn’t hold a candle to the Solo 401k?  Ok, got it.  Here goes:

Reason #1:  Both SEP’s and solo 401k’s have the same very high contribution limit – around $60 grand per year – but there’s another limitation, too:  You can only deposit a max of 20-25% of your business’ net earnings.  So even if your salary is $1 million dollars, you still won’t be able to deposit a single penny if your business isn’t actually profitable.  But the 401k has a big carve-out… you CAN do a straight deposit of up to $24,000 per year from your salary that’s wholly unconnected to the profits of your business.  But with a SEP… again… if your business isn’t profitable, you can’t contribute ANYTHING to it, no matter what your salary is.  So it’s MUCH EASIER to actually qualify to make a deposit into a solo 401k than into a SEP.

Reason #2:  There’s technically no such thing as a ROTH SEP!  You could make a non-deductible contribution to a SEP, and then convert it into a ROTH account, but you’ve got to do that 2-step process each time, and there are restrictions about how much and whether you can actually do that.  But with a properly structured solo 401k, there’s both a TRADITIONAL and a ROTH component to it.  With each individual contribution, you can choose whether that contribution will be taxed as TRADITIONAL or as ROTH.

Reason #3:  At the end of the day, the SEP IRA is still an IRA.  That means if you mess up and commit a prohibited transaction in your SEP IRA – which is, unfortunately, easy to do with real estate transactions –  you’ve got a real problem that could cost you the entire value of your account.  With a solo 401k, you’ve got to follow the same rules… but it’s pretty simple and cheap to fix errors… plus, errors only affect the one asset where you messed up rather than the entire account like with an IRA, including SEP’s.

Now here’s the thing:  A lot of you have bankers or financial advisors who either don’t even suggest that you consider a solo 401k, or who even suggest a SEP IRA as a superior alternative to the solo 401k.

I’m sorry, but there are only two reasons one might make such a recommendation:  One is that your advisor simply doesn’t know better, and the other is that your advisor is actually receiving a commission from the investments made in your SEP IRA, but would NOT be making a commission from your solo 401k transactions.  The only way to know for sure is to ASK.

So here’s the big idea for today:  If you qualify for both the solo 401k and the SEP IRA, choose the solo 401k… but only if you want to make the right choice.

That’s all for today… so what’s on tap for tomorrow’s episode of Self Directed Investor Talk?

We’re going to look into solo 401k’s a little bit more.  That’s because they’re NOT ALL THE SAME.  If you pick any 3 solo 401k programs offered by most of the self-directed IRA custodians, they’ll all be different and offer you a different subset of the potential that the law actually provides to you.

I’ll tell you what features to look for… and which types of solo 401k’s you should completely AVOID.  The link to that episode is available by clicking the red “Next Episode” link at the bottom of the page.

What do you think, my friends?  Sound off!  Your comments, questions, even criticisms are welcomed in the comments area below.  But let’s just be honest… what’s to criticize? <g>

My friends, invest wisely today, and live well forever!

Self Directed Investor Talk
Self Directed IRA Fundamentals
Self Directed IRA Custodians
Self Directed IRA FAQ


Leave a Reply

Previous Episode of Self Directed Investor Talk     Subscribe to Self Directed Investor Talk     Next Episode of Self Directed Investor Talk

Bryan Ellis is host of Self Directed Investor Talk, America's #1 radio show and podcast for affluent self-directed investors.  He's also an expert in self-directed IRA's, solo 401k's and turnkey rental property investing... at least, that's what his wife tells him 🙂  He's a contributor to well-respected publications like TheStreet.com, Entrepreneur and ThinkRealty.  Bryan lives in metro Atlanta, Georgia with Carole Ellis - his wife, business partner and best friend - and his 4 children ranging in age from 2 to 19.