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A SEP IRA allows tax-deductible contributions and tax-deferred growth. Easy to set up at basically any broker. Very minimal paperwork involved. In a Solo 401k their are similar tax advantages as with the SEP, however with more paperwork, a more limited number of administrators, and higher contribution limits.

The max for a SEP is up to 25% of compensation with a cap of $49,000 for 2011. Solo 401k allows profit sharing contributions of up to 25% of compensation plus tax-deductible salary deferrals to the plan of up to $16,500 for 2011 ($17,000 for 2012). The cap is now at $49,000 for 2011.

So while the caps are the same, you can make very little self-employed income and basically defer it all, which you can’t do with the SEP. This gives you that added flexibility which is especially beneficial for those who have some self-employed income as secondary income and want to get the most tax advantages.

For example, if you made $16,500 of eligible compensation, you could sock all $16,500 of it away with a Self-Employed 401k, but only $5,000 with a SEP. Of course, if your self-employed income is substantial and/or is your sole source of income, 25% may be plenty and I’d then go with the simplicity of the SEP.

One thing worth mentioning is that the SEP IRA is typically not the best vehicle if you are self-employed and don’t have W2 income. In this case, the SE 401K is almost always better, particularly since the Roth 401K is available as well. In the case of self-employment as a second income, with a 401K and W2 available, the self-employed 401K is not available, but the SEP-IRA is and is a good choice in this case.

A bit of digging revealed that employer SEP contributions don’t appear to count against your limit for Traditional or Roth IRA contributions (again, you’re your own employer, so you can make these contributions on your own behalf). Assuming this to be true, you can max out your regular IRA and contribute to a SEP. In addition, you can also rollover your SEP into your Traditional or Roth IRA. Thus, you can take advantage of the SEP without having to keep track of an extra account over the long term but instead you can open your SEP account, fund it, roll it over into your Traditional or Roth IRA, and then close it. While it’s a bit of extra work, it might be a good way of supercharging your retirement savings if you have any self-employment income lying around.

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