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Retirement Planning
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Re: SEP IRA and Individual 401k

Tough question.

With a SEP, you can contribute 20% of your self-employment earnings into a SEP IRA each year. With a Solo 401k, you can contribute $16.5k plus 20% of your self employment income. The maximum retirement plan contribution per employer is $49k for 2009 - which is comprised of 401k salary deferrals and the employer matching contributions.

If you will net more than $245k this year as an independent contractor, you would be able to contribute $49k into either a SEP or a Solo 401k. So the Solo 401k wouldn't get you anything this year. (If you will be 50 or older by 12/31/09, you would be able to contribute an additional $5.5k into your Solo 401k, however.)

Or, if you work for another employer that offers a 401k, you could max out your $16.5k of salary deferrals ($22k if 50 or older). Remember, your salary deferrals need to be aggregated for all your retirement plans each year, so any salary deferrals made into one plan reduces the salary deferrals you could make into another plan. By contributing $16.5k into a 401k or 403b through your job, the amount you could contribute to a SEP matches the contribution you could make into your Solo 401k.

So what should you do if you will not make more than $245k this year and do not work for another employer that provides you with a 401k or 403b? I would recommend contacting the retirement departments of Vanguard and Schwab to see if you get a different answer.

You would think they IRS would not mind if you took back the $900 you already contributed to your SEP for 2009 to put yourself in a situation to contribute more into your retirement accounts.

Let me know what these two financial institutions tell you.

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