Is a 401K Worth It as a Small Business Owner?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Cheego
Posts: 56
Joined: Mon Jul 18, 2016 11:57 am
Location: Greenville, SC

Is a 401K Worth It as a Small Business Owner?

Post by Cheego » Mon May 13, 2019 2:58 pm

I operate a small business with 3 employees of which two are me and my wife. The 401k costs us $2k in admin and TPA fees. We pay about $2k for advisory fees. And we contribute $11k to the one employee's 401k each year.

I'm starting to wonder if there really is much of an advantage to having the 401k. We started it as a way to reduce our tax bill each year but I'm not certain that our tax rate will be any lower in retirement than it is now.

How would I find out what the net benefit is (in a dollar amount) to know if it's worth the $15,000 cost?

niceguy7376
Posts: 2318
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Is a 401K Worth It as a Small Business Owner?

Post by niceguy7376 » Mon May 13, 2019 3:07 pm

So, you dont have a safe harbor 401k but some other type where YOU (Employer) is contributing to a 401k? How much does Employer contribute to your and your wife 401k in this scenario per year?

There are some companies that offer a small business 401k that costs a lot less than what you quoted in here.
We do our payroll (employees in different states) through Gusto and they have agreement with Guideline to offer 401k for a flat fee of Min $40 and then $8 per participant per month. The fund options are pretty decent.

Maybe you need to explore other providers and also have a safe harbor so that employee needs to contribute to get a match.

ChinchillaWhiplash
Posts: 757
Joined: Sat Jan 20, 2018 5:40 pm
Location: Colorado

Re: Is a 401K Worth It as a Small Business Owner?

Post by ChinchillaWhiplash » Mon May 13, 2019 3:13 pm

Have you looked at a SEP-IRA? Might work out better. Would be cheaper to set up and run I would think.

MotoTrojan
Posts: 4528
Joined: Wed Feb 01, 2017 8:39 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by MotoTrojan » Mon May 13, 2019 3:17 pm

Guideline is apparently closer to $500 + $96/employee. Maybe check them out. Low cost Vanguard funds.

niceguy7376
Posts: 2318
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Is a 401K Worth It as a Small Business Owner?

Post by niceguy7376 » Mon May 13, 2019 3:20 pm

Outside of a 401k, FIdo SIMPLE IRA is one alternate choice. No fee and you get to invest in any Funds available in Fido.

MichCPA
Posts: 550
Joined: Fri Jul 06, 2018 9:06 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by MichCPA » Mon May 13, 2019 3:25 pm

I would endorse looking at alternatives before just deep six-ing any plan. (SIMPLE or cheaper 401k). I would also focus more on admin fee reduction, because the 11k assumes you wouldn't adjust comp of the employee to account for any reduction in benefits. Considering the competitive employment market right now, losing an employee might cost you more than this 401k.

smitcat
Posts: 3436
Joined: Mon Nov 07, 2016 10:51 am

Re: Is a 401K Worth It as a Small Business Owner?

Post by smitcat » Mon May 13, 2019 3:34 pm

Agreed that the fees are very high and your one employee benefit is unusual.
In our small business our 401K is worth it for us - that I can answer.
In order to answer your question you would need to look at your tax rates, what you would do for your one employee if the 401K was removed, why your fees are high, and what you future goals and taxes might be.

JBTX
Posts: 5083
Joined: Wed Jul 26, 2017 12:46 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by JBTX » Mon May 13, 2019 4:06 pm

Guideline would be cheaper if you just doing straight up 401k. Employee Fiduciary is also probably a little cheaper than what you are paying.

I'd question the $2000 in advisory fees. That is a hefty annual sum just to protect yourself from one employee suing you due to poor fund choices.

The fact that you pay $11k to employee is presumably a choice you are making.

Now with only 3 employees you may be able to contribute more via some sort of profit sharing plan, but Guideline can't help you with that. Employee Fiduciary can but I've heard anecdotally they don't always do it correctly.

JGoneRiding
Posts: 1678
Joined: Tue Jul 15, 2014 3:26 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by JGoneRiding » Mon May 13, 2019 4:12 pm

ChinchillaWhiplash wrote:
Mon May 13, 2019 3:13 pm
Have you looked at a SEP-IRA? Might work out better. Would be cheaper to set up and run I would think.
While there are limitations to them sep/simple IRAs are good for this limited employee situation. One down side is you pretty much have to offer them to all eligible employees (not a big deal clearly at the moment but you can't just cancel the contributions like some companies do for 401k if times good hard)

User avatar
gilgamesh
Posts: 1500
Joined: Sun Jan 10, 2016 9:29 am

Re: Is a 401K Worth It as a Small Business Owner?

Post by gilgamesh » Mon May 13, 2019 8:00 pm

You have to compare what you are doing now (401k) vs taxable or vs simple IRA+taxable and see.

You have to make some assumption on years before withdrawal, growth percentage and tax drag on taxable (this isn’t much)...and do the math.

You only have one employee with spouse and you , so tax deferrals might be ok - run the numbers. Think about small businesses with multiple employees. Many times the only advantage in those cases is to attract good employees - 401k will be an expense to attract good employees.

Many small business owners just look at, say $18k in taxes saved, $15k in costs and think they are good. They don’t think it through...

Topic Author
Cheego
Posts: 56
Joined: Mon Jul 18, 2016 11:57 am
Location: Greenville, SC

Re: Is a 401K Worth It as a Small Business Owner?

Post by Cheego » Tue May 14, 2019 9:02 am

gilgamesh wrote:
Mon May 13, 2019 8:00 pm
...run the numbers... Many small business owners just look at, say $18k in taxes saved, $15k in costs and think they are good.
Thank you gilgamesh... You touched on the important part of my question where you wrote "run the numbers". But before I go any further, a few data points...

- We use Employee Fiduciary and their rates are reasonable considering they are the TPA and record keeper.
- Our 401k is a safe harbor plan
- We also have and have had a profit sharing plan for many years which is a big part of the $11k contributions we make to the plan on behalf of our employee (and ourselves).
- Historically speaking, the 401k is not much of a consideration for our past employees so if we dropped it, there would not be concern on our part that we'd have trouble finding another staff member since we pay very well for this job.

But my original question was not so much about the costs of the plan. The question was how do I evaluate what the net benefit is of having the 401k? Let's just say I'm just touching into the 32% tax bracket now and just touching into the 24% bracket in retirement (assuming today's tax rules are the same at retirement - which I know they won't be).

So on a very basic level, I'm paying 8% less in taxes by deferring them in a 401k. If my wife and I contribute a combined $38k and the business (S-Corp) contributes $22k, then that is $60k. Then I take 8% of $60K which equals $4,800 and subtract out real cost of having the 401k plan (that would be $15k less 32%) so let's just call it $10k in real cost.

Sounds like I'm spending $10k to save $4,800.

smitcat
Posts: 3436
Joined: Mon Nov 07, 2016 10:51 am

Re: Is a 401K Worth It as a Small Business Owner?

Post by smitcat » Tue May 14, 2019 10:06 am

Cheego wrote:
Tue May 14, 2019 9:02 am
gilgamesh wrote:
Mon May 13, 2019 8:00 pm
...run the numbers... Many small business owners just look at, say $18k in taxes saved, $15k in costs and think they are good.
Thank you gilgamesh... You touched on the important part of my question where you wrote "run the numbers". But before I go any further, a few data points...

- We use Employee Fiduciary and their rates are reasonable considering they are the TPA and record keeper.
- Our 401k is a safe harbor plan
- We also have and have had a profit sharing plan for many years which is a big part of the $11k contributions we make to the plan on behalf of our employee (and ourselves).
- Historically speaking, the 401k is not much of a consideration for our past employees so if we dropped it, there would not be concern on our part that we'd have trouble finding another staff member since we pay very well for this job.

But my original question was not so much about the costs of the plan. The question was how do I evaluate what the net benefit is of having the 401k? Let's just say I'm just touching into the 32% tax bracket now and just touching into the 24% bracket in retirement (assuming today's tax rules are the same at retirement - which I know they won't be).

So on a very basic level, I'm paying 8% less in taxes by deferring them in a 401k. If my wife and I contribute a combined $38k and the business (S-Corp) contributes $22k, then that is $60k. Then I take 8% of $60K which equals $4,800 and subtract out real cost of having the 401k plan (that would be $15k less 32%) so let's just call it $10k in real cost.

Sounds like I'm spending $10k to save $4,800.
A few thoughts:
- How do you figure that your real costs are the full $11K for that one employee? (drop the match then at least for comparison sake) I believe Safe Harbor requires a 4% match, no more.
- You do not mention state tax, what are your state taxes now and will they be less in retirement?
- What is the likelihood hat your business would be better served with less owner payroll and more profits resulting in higher taxes for the business and a higher deduction of these plans?
- How much of the 22% rate in retirement can you avoid by doing Roth converts ahead of time and what would that new rate look like?
- How much of the projected RMD can you spend before the projected 22% tax rate will be in affect?
- depending upon the year of retirement that 24% rate in retirement may be higher
- Why do you need the $2K advisory fees?

User avatar
gilgamesh
Posts: 1500
Joined: Sun Jan 10, 2016 9:29 am

Re: Is a 401K Worth It as a Small Business Owner?

Post by gilgamesh » Tue May 14, 2019 12:28 pm

Cheego wrote:
Tue May 14, 2019 9:02 am
gilgamesh wrote:
Mon May 13, 2019 8:00 pm
...run the numbers... Many small business owners just look at, say $18k in taxes saved, $15k in costs and think they are good.
Thank you gilgamesh... You touched on the important part of my question where you wrote "run the numbers". But before I go any further, a few data points...

- We use Employee Fiduciary and their rates are reasonable considering they are the TPA and record keeper.
- Our 401k is a safe harbor plan
- We also have and have had a profit sharing plan for many years which is a big part of the $11k contributions we make to the plan on behalf of our employee (and ourselves).
- Historically speaking, the 401k is not much of a consideration for our past employees so if we dropped it, there would not be concern on our part that we'd have trouble finding another staff member since we pay very well for this job.

But my original question was not so much about the costs of the plan. The question was how do I evaluate what the net benefit is of having the 401k? Let's just say I'm just touching into the 32% tax bracket now and just touching into the 24% bracket in retirement (assuming today's tax rules are the same at retirement - which I know they won't be).

So on a very basic level, I'm paying 8% less in taxes by deferring them in a 401k. If my wife and I contribute a combined $38k and the business (S-Corp) contributes $22k, then that is $60k. Then I take 8% of $60K which equals $4,800 and subtract out real cost of having the 401k plan (that would be $15k less 32%) so let's just call it $10k in real cost.

Sounds like I'm spending $10k to save $4,800.
At a basic level, this is how I would compare if the cost was $15k. With 401k you are contributing $60k, with taxable you will contribute $60k + cost $15k - 32% tax = $51k

Say all of that grows for 20 years and withdrawn all at once, growth averages 7% for 401k and taxable at 6.8% accounting for tax drag.

In 20 years 401k will have $232,181 and taxable $190,105.

$232,181 is taxed at 22% so you have $181,101 to spend.

Taxable will grow to $190,105 and $139,105 will be taxed @15% LTCG rate and you will have $169,239 to spend. So, 401k is better in this imaginary, hypothetical situation.

However, if you can manage to be @ 0% LTCG rate then taxable is better...

This is a quick way of checking...

With safeharbor you can do non-elective match of 3% only...so, I don’t quite understand the $15k cost. Employee Fiduciary is a great choice, but for safe harbor with limited testing requirements guideline.com with even cheaper cost should be sufficient.

P.S: Double check my math though, I did it quickly to show the principle behind it.

User avatar
gilgamesh
Posts: 1500
Joined: Sun Jan 10, 2016 9:29 am

Re: Is a 401K Worth It as a Small Business Owner?

Post by gilgamesh » Tue May 14, 2019 1:36 pm

smitcat wrote:
Tue May 14, 2019 10:06 am
Cheego wrote:
Tue May 14, 2019 9:02 am
gilgamesh wrote:
Mon May 13, 2019 8:00 pm
...run the numbers... Many small business owners just look at, say $18k in taxes saved, $15k in costs and think they are good.
Thank you gilgamesh... You touched on the important part of my question where you wrote "run the numbers". But before I go any further, a few data points...

- We use Employee Fiduciary and their rates are reasonable considering they are the TPA and record keeper.
- Our 401k is a safe harbor plan
- We also have and have had a profit sharing plan for many years which is a big part of the $11k contributions we make to the plan on behalf of our employee (and ourselves).
- Historically speaking, the 401k is not much of a consideration for our past employees so if we dropped it, there would not be concern on our part that we'd have trouble finding another staff member since we pay very well for this job.

But my original question was not so much about the costs of the plan. The question was how do I evaluate what the net benefit is of having the 401k? Let's just say I'm just touching into the 32% tax bracket now and just touching into the 24% bracket in retirement (assuming today's tax rules are the same at retirement - which I know they won't be).

So on a very basic level, I'm paying 8% less in taxes by deferring them in a 401k. If my wife and I contribute a combined $38k and the business (S-Corp) contributes $22k, then that is $60k. Then I take 8% of $60K which equals $4,800 and subtract out real cost of having the 401k plan (that would be $15k less 32%) so let's just call it $10k in real cost.

Sounds like I'm spending $10k to save $4,800.
A few thoughts:
- How do you figure that your real costs are the full $11K for that one employee? (drop the match then at least for comparison sake) I believe Safe Harbor requires a 4% match, no more.
- You do not mention state tax, what are your state taxes now and will they be less in retirement?
- What is the likelihood hat your business would be better served with less owner payroll and more profits resulting in higher taxes for the business and a higher deduction of these plans?
- How much of the 22% rate in retirement can you avoid by doing Roth converts ahead of time and what would that new rate look like?
- How much of the projected RMD can you spend before the projected 22% tax rate will be in affect?
- depending upon the year of retirement that 24% rate in retirement may be higher
- Why do you need the $2K advisory fees?
These are clearly some of the many things to consider as well, so OP you need to have a full picture.

Lee_WSP
Posts: 319
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Is a 401K Worth It as a Small Business Owner?

Post by Lee_WSP » Wed Jun 12, 2019 7:21 pm

I know this thread is a month old, but I have similar questions as the OP.

OP,
You need to ask a first question: What is the net benefit of the profit sharing agreement? Because that's the largest drag on your plan. The benefit is extra tax deferred savings to you & your wife + goodwill of employee. The cost is the benefits now going to employee minus tax savings.

You need to ask this question first before comparing other options because you don't have to do it. It's not required.


From there, I think I have the elements sort of figured out.

Costs:
3% + (1/2 of next 2%) for safe harbor matches (if employees even opt in) (minus any tax savings)
  • Net 1% more expensive match than SIMPLE
admin fees (EF charges $1500/yr; guideline advertises $480/yr)
AUM fees (EF is .08%; Guideline doesn't advertise having any)

Benefits:
Higher contribution limits compared to SIMPLE IRA
Can do backdoor Roth w/ no prorated IRA issues
Roth 401k possible
Profit matching possible (55+k max tax deferred options)
Can stop benefits mid year (I hear, not sure on this one I suppose it would be governed by the plan documents & rules for safe harbor plans)

My question to the rest of the forum is: am I missing any costs/benefits compared to a SIMPLE plan (which I personally see as the clear and obvious alternative for those of us with employees). The other not so good (and probably bad) option is no plan.

smitcat
Posts: 3436
Joined: Mon Nov 07, 2016 10:51 am

Re: Is a 401K Worth It as a Small Business Owner?

Post by smitcat » Wed Jun 12, 2019 7:30 pm

Lee_WSP wrote:
Wed Jun 12, 2019 7:21 pm
I know this thread is a month old, but I have similar questions as the OP.

OP,
You need to ask a first question: What is the net benefit of the profit sharing agreement? Because that's the largest drag on your plan. The benefit is extra tax deferred savings to you & your wife + goodwill of employee. The cost is the benefits now going to employee minus tax savings.

You need to ask this question first before comparing other options because you don't have to do it. It's not required.


From there, I think I have the elements sort of figured out.

Costs:
3% + (1/2 of next 2%) for safe harbor matches (if employees even opt in) (minus any tax savings)
  • Net 1% more expensive match than SIMPLE
admin fees (EF charges $1500/yr; guideline advertises $480/yr)
AUM fees (EF is .08%; Guideline doesn't advertise having any)

Benefits:
Higher contribution limits compared to SIMPLE IRA
Can do backdoor Roth w/ no prorated IRA issues
Roth 401k possible
Profit matching possible (55+k max tax deferred options)
Can stop benefits mid year (I hear, not sure on this one I suppose it would be governed by the plan documents & rules for safe harbor plans)

My question to the rest of the forum is: am I missing any costs/benefits compared to a SIMPLE plan (which I personally see as the clear and obvious alternative for those of us with employees). The other not so good (and probably bad) option is no plan.

"My question to the rest of the forum is: am I missing any costs/benefits compared to a SIMPLE plan (which I personally see as the clear and obvious alternative for those of us with employees)"
In our case a simple plan was always very top heavy and restricted the participation to the point that it was not worth it.
FWIW - we tried it twice, each time the staff had "guaranteed' they would sign up and stay participatory…. shame on us for tryin the second time.
We have a safe harbor plan now and the lack of participation is both alarming and a net lower cost than expected.

Lee_WSP
Posts: 319
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Is a 401K Worth It as a Small Business Owner?

Post by Lee_WSP » Wed Jun 12, 2019 9:37 pm

smitcat wrote:
Wed Jun 12, 2019 7:30 pm
FWIW - we tried it twice, each time the staff had "guaranteed' they would sign up and stay participatory…. shame on us for tryin the second time.
We have a safe harbor plan now and the lack of participation is both alarming and a net lower cost than expected.
I must be missing something. How do you save money by paying the 401k fees vs no fees for a simple IRA?

bmleaser
Posts: 7
Joined: Wed Apr 19, 2017 1:51 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by bmleaser » Wed Jun 12, 2019 9:50 pm

Do not use guideline. Their customer service is beyond terrible. They will screw things up, they will not respond to you, and it will cost you money. Avoid them at all costs.

NativeTxn
Posts: 42
Joined: Mon May 20, 2019 9:32 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by NativeTxn » Wed Jun 12, 2019 10:13 pm

smitcat wrote:
Wed Jun 12, 2019 7:30 pm
"My question to the rest of the forum is: am I missing any costs/benefits compared to a SIMPLE plan (which I personally see as the clear and obvious alternative for those of us with employees)"
In our case a simple plan was always very top heavy and restricted the participation to the point that it was not worth it.
FWIW - we tried it twice, each time the staff had "guaranteed' they would sign up and stay participatory…. shame on us for tryin the second time.
We have a safe harbor plan now and the lack of participation is both alarming and a net lower cost than expected.
How was your SIMPLE IRA plan top heavy? There is no non-discrimination testing on a SIMPLE.

User avatar
BoglePaul
Posts: 197
Joined: Tue Jul 29, 2014 2:34 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by BoglePaul » Wed Jun 12, 2019 10:15 pm

401k is pricey and a pain (fees, documents to update, poor service from the fiduciary, payroll mistakes). SEP-IRA is much easier when less than 10 employees.

NativeTxn
Posts: 42
Joined: Mon May 20, 2019 9:32 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by NativeTxn » Wed Jun 12, 2019 10:48 pm

It may be worth noting that the main downside to a SEP-IRA when you have employees is that once they are eligible, any year that you do a contribution for yourself, you are required to do an equal (on a percentage of salary basis) contribution for all eligible employees. All SEP contributions are considered as coming from the company, so you can't set it up for matching such that the employee could be required to defer some of their pay in order for the company to kick money in.

It basically boils down to: if you, the owner, do X% of your compensation into a SEP in year 20XX, you must also contribute X% of all eligible employee's salaries into a SEP IRA for them.

If you only have a few low(er) paid employees, or you have high employee turnover such that few, if any, ever become eligible for the SEP, then it can still work out well since SEPs are so easy to set up and maintain. But if you have long tenured employees that have relatively high(er) comp, it may end up costing the company more than a SIMPLE IRA and/or the 401k.

smitcat
Posts: 3436
Joined: Mon Nov 07, 2016 10:51 am

Re: Is a 401K Worth It as a Small Business Owner?

Post by smitcat » Thu Jun 13, 2019 7:14 am

Lee_WSP wrote:
Wed Jun 12, 2019 9:37 pm
smitcat wrote:
Wed Jun 12, 2019 7:30 pm
FWIW - we tried it twice, each time the staff had "guaranteed' they would sign up and stay participatory…. shame on us for tryin the second time.
We have a safe harbor plan now and the lack of participation is both alarming and a net lower cost than expected.
I must be missing something. How do you save money by paying the 401k fees vs no fees for a simple IRA?
You are right I was wrong it was the basic 401K not the simple 401K.
The simple 401K plan would limit us to 2/3rds our deductions under the safe harbor (wife and I) - about another $18K per year.
So the simple plan was not a fit for us.

smitcat
Posts: 3436
Joined: Mon Nov 07, 2016 10:51 am

Re: Is a 401K Worth It as a Small Business Owner?

Post by smitcat » Thu Jun 13, 2019 7:17 am

NativeTxn wrote:
Wed Jun 12, 2019 10:48 pm
It may be worth noting that the main downside to a SEP-IRA when you have employees is that once they are eligible, any year that you do a contribution for yourself, you are required to do an equal (on a percentage of salary basis) contribution for all eligible employees. All SEP contributions are considered as coming from the company, so you can't set it up for matching such that the employee could be required to defer some of their pay in order for the company to kick money in.

It basically boils down to: if you, the owner, do X% of your compensation into a SEP in year 20XX, you must also contribute X% of all eligible employee's salaries into a SEP IRA for them.

If you only have a few low(er) paid employees, or you have high employee turnover such that few, if any, ever become eligible for the SEP, then it can still work out well since SEPs are so easy to set up and maintain. But if you have long tenured employees that have relatively high(er) comp, it may end up costing the company more than a SIMPLE IRA and/or the 401k.
Yes - agreed. Are not the SEP yearly limits also lower than a safe harbor plan?

NativeTxn
Posts: 42
Joined: Mon May 20, 2019 9:32 pm

Re: Is a 401K Worth It as a Small Business Owner?

Post by NativeTxn » Thu Jun 13, 2019 7:44 am

smitcat wrote:
Thu Jun 13, 2019 7:17 am
NativeTxn wrote:
Wed Jun 12, 2019 10:48 pm
It may be worth noting that the main downside to a SEP-IRA when you have employees is that once they are eligible, any year that you do a contribution for yourself, you are required to do an equal (on a percentage of salary basis) contribution for all eligible employees. All SEP contributions are considered as coming from the company, so you can't set it up for matching such that the employee could be required to defer some of their pay in order for the company to kick money in.

It basically boils down to: if you, the owner, do X% of your compensation into a SEP in year 20XX, you must also contribute X% of all eligible employee's salaries into a SEP IRA for them.

If you only have a few low(er) paid employees, or you have high employee turnover such that few, if any, ever become eligible for the SEP, then it can still work out well since SEPs are so easy to set up and maintain. But if you have long tenured employees that have relatively high(er) comp, it may end up costing the company more than a SIMPLE IRA and/or the 401k.
Yes - agreed. Are not the SEP yearly limits also lower than a safe harbor plan?
Max contribution to the SEP is the lesser of 25% of comp (net earning), or $56,000.

Max contribution limit to 401k ("regular," solo, or Safe Harbor) is $56,000 (combined sources of EE deferral, ER match, and ER profit sharing), though if you're over 50, you can also do the catch-up contribution for a max total of $62,000.

But you can generally put more into a 401k with lower comp than a SEP. For example, if your plan allows for 100% deferral of your comp and you got a 5% match, you could theoretically earn $19,000 and have deposits into your 401k of $19,950 (100% deferral of $19,000 salary + 5% match) just between salary deferral and ER match (this would, of course, assume that you probably have a spouse who earns significantly more and you're just working to work, or maybe a high school or college kid who works and whose parents pay for everything, or something like that since most people couldn't defer 100% of comp and still have a place to live, food to eat, etc.).

To be able to put $19,950 into a SEP, you'd have to show comp of $79,800 ($19,950 / 25%).

So, while the total max contribution for anyone under 50 is the same between a SEP and a 401k, I would argue that the effective max is lower on a SEP than a 401k.


Post Reply