Self-employed 401(k) retirement plans

With your SEP IRA you are able to contribute 20 percent of your net self-employment income up to $53,000 for 2015. With your solo 401(k) you can contribute the same 20 percent of your net income plus an additional $18,000 up to a combined total of $53,000. And if you are age 50 or over you can contribute an additional $6,000 this year. Solo 401(k) plans are great for self-employed taxpayers who have no employees, have net incomes of less than $265,000, and who want to shelter more than 20 percent of their net income from taxes. For example, if your net self-employed compensation is $100,000, then your maximum SEP IRA contribution is $20,000. With a solo 401(k) you could contribute $20,000 plus a defined contribution of $18,000 for a total of $38,000. If you are 50 or over, you could contribute and defer taxes on $44,000.

When your solo 401(k) plan exceeds $250,000, you are required to file a tax return for the plan using IRS Form 5500-SF or Form 5500-EZ. The $250,000 does not include the money in your SEP IRA and there is no requirement for you to file a tax return for your SEP IRA regardless of the amount in the account. If your solo 401(k) plan value exceeds $250,000 at the end of the year and you fail to file a tax return for the plan, you are subject to a penalty of $25 per day up to $15,000. Solo 401(k) plan owners who should have filed and did not should consult with their tax professional for advice.