Comparing an SEP and a 401K

If you are considering investing in an SEP, a 401k might also be something to look at. Both types of accounts have some unique features that make them attractive to certain individuals. Here are a few things to consider about both the SEP and a 401k account.

SEP

The term "SEP" refers to "simplified employee pension." This type of investment is designed to help the self-employed save for retirement. In order to qualify for this type of account, you must be a sole proprietor or business owner, be in a partnership, or earn self-employment income.

With this type of retirement account, you can contribute up to 25 percent of your annual income. That is allowed up to a maximum of $49,000 for the year. This contribution limit is quite a bit bigger than many other types of retirement accounts. Once you contribute the money to the account, you are free to invest it as you please. The money that you make from investments will be tax-deferred until you start withdrawing it upon retirement.

This type of account is known for its convenience and easy processing. There is not a lot of paperwork to do or forms to fill out with this type of retirement account. Therefore, if you are a business owner and have a few employees to whose retirement funds you wish to contribute, this could be a good option. There are no reports due to the IRS at the end of the year. This type of account is very user friendly.

Another advantage of this type of account is that you have a lot of flexibility when it comes to choosing investments. This is a type of IRA, and IRAs are known for having many investments to choose from. Therefore, if you do not feel like investing only in the stock market or in bonds, this might be the way to go.

401k

A 401k is another type of investment account that allows you to save for retirement. Like the SEP, this account gives you the advantage of being able to defer your taxes until you retire. This type of account is offered through an employer. Therefore, if you are an employee, there is a chance that your employer could offer this. One of the major advantages of having a 401k that is offered through your employer is that you can receive matching contributions from your employer. For example, they might set it up to match 50 percent of your contributions up to a certain limit. Therefore, whenever you put any money into your account, it is like you have made a 50 percent return on investment before the money ever even gets to the market.

This type of account will not allow you to set aside as much money for retirement each year. You will have a $16,500 annual limit to contend with. Therefore, this type of account is good to have, but it may not be enough alone to support you during retirement.

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