SEP-IRA vs. Solo 401K (also called: Self-Employed 401K or Individual 401K) For Anna Li’s team members Internal training use only

SEP-IRA A Simplified Employee Pension Plan, commonly known as a SEP-IRA, is a retirement plan specifically designed for self- employed people and small-business owners. When establishing a SEP-IRA plan for your business, you and any eligible employees establish your own separate SEP-IRA; employer contributions are then made into each eligible employee’s SEP-IRA.

Solo 401K: Who Can Establish Solo 401K is available to self-employed individuals or business owners with no employees other than a spouse(or with part- time employees who work less than 1000 hours per year), including sole proprietors, partnerships, corporations, and "S" corporations (also LLCs and LLPs).

SEP-IRA Eligibility: You can establish a SEP-IRA if you: Are a sole proprietor, in a partnership, or a business owner (of either an unincorporated or incorporated business, including Subchapter S corporations); Earn any self-employed income by providing a service, either full-time or part-time, even if you are already covered by a retirement plan at your full-time job.

Tax Advantages of SEP-IRA Tax-deductible contributions Up to 25% of compensation (20% if you are self-employed), as much as $49,000 for the 2010 plan year.*Tax- deferred growth potential Any investment earnings grow tax-deferred until withdrawn. The maximum compensation on which contributions can be based is $245,000 for the 2010 plan year. For self-employed individuals, compensation means earned income (1099).

Contribution flexible (SEP-IRA) No annual contribution required Contribution percentage can very each year, from 0% - 25% of compensation, up to $49,000 per participant for the 2010* All SEP-IRA contributions must be made by the employer, and the same percentage of compensation must be contributed for each eligible employee (based on W-2 wages) including the employer. Use our worksheet to calculate your SEP-IRA contribution.* Use our worksheet to calculate your SEP-IRA contribution Please note: for self-employed (single unincorporated business owner): Quote from IRS publication 560 (Year 2010, page 3): “The deduction for contribution to your own SEP-IRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan.” You are required to use the worksheet on Page 22 of Publication 560 to determine your contribution. The result (allowed maximum contribution) is equal to: (net earning – half self-employment tax) x 20%, which is also equal to: (net earning – half self-employment tax – allowed contribution) x 25%

Solo 401K (Self employed 401K or Individual 401K) Higher Contribution Limits Solo or Self-Employed 401(k) allows you to make tax-deductible 401(k) salary deferrals to the plan of up to $16,500 for If you are age 50 or older you can make an additional catch-up salary deferral contribution of $5,500 for The plan also lets business owners make tax-deductible profit sharing contributions of up to 25% of compensation, up to the annual maximum of $49,000 for the 2010 plan year. Note that the total of salary deferrals and profit sharing contributions cannot exceed $49,000 for 2010 (or $54,5000 if age 50 or older).

SEP-IRA vs. Solo 401K (examples, age < 50) Earned Income SEP-IRA Solo 401K $100,000$25,000 (=$100,000 x 25%) $41,500 (=$25,000 + $16,500) $245,000 ( > $196,000) $49,000 (=$196,000 x 25%) ($245,000 x 25% = $61,500 > $49,000) $49,000 ($245,000 x 25% = $61,500 > $49,000) 2010 Contribution Limits for Incorporated Business Owner: 2010 Contribution Limits for Unincorporated Business Owner (self-employed): Earned Income SEP-IRA Solo 401K $100,000$18,587 =($100,000 - $7065)x25% $35,087 (=$18,587 + $16,500) $245,000 $45,538 = ($245,000 -$17309) x 20% $49,000 $45,538 + $16,500 = $62,038 > $49,000

Company available for SEP-IRA Annuity company: Prudential, AllianzLife, ING, WRL, etc. Mutual funds company: Fidelity, American funds, AIM, etc. ***Solo 401K or Self Employed 401K*** Fidelity vs. AIM Funds: Can’t loan out vs. can loan out.

Reference: IRS Publication 560 (2010) irement/individual_401k?cmsid=P &lvl1=home&lvl2=account_types