Which is better: SEP IRA or a Solo 401k?

Given that the contribution limits are the same for either account, should you set up a SEP IRA or a Solo-401k for your locums or side hustle income? The main reason to choose a SEP IRA over a Solo-k is that you can set up and contribute to a SEP IRA after the close of the year. In fact, if you file an extension for your tax return, you have until the extended due date to establish and contribute to your SEP IRA for the prior year (September 15 for partnerships and October 15 for individuals and corporations).

The disadvantage of having a SEP IRA is the “pro-rata” rule. If you have a balance in any pre-tax IRA accounts at the end of the year when you complete a back-door Roth IRA contribution, you will owe tax on the conversion. These accounts include Traditional IRAs (TIRAs), SIMPLE IRAs, and SEP IRAs.

Here’s how to handle retirement contributions for moonlighting income from the prior year if you want to do a back-door Roth IRA and you didn’t get your 401k set up by December 31 2019:

  • File an extension if you want to contribute to your SEP between 4/15/20 and 10/15/20.
  • Contribute to a TIRA by 4/15/20 for 2019. It will be nondeductible. Be sure to file Form 8606 with your 1040 for 2019.
  • Open a Solo-k account for 2020.
  • Roll the balance in your SEP IRA account into your Solo-k & close the SEP IRA.
  • Convert your TIRA contribution to a Roth.
  • Contribute up to $56k/$62k (based on self-employment income) into your Solo-k for 2020. Future contributions will go to the Solo-k.

What is a Solo 401k?

Backdoor Solo-401k Plans


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