← Suze Orman's Women & Money (And Everyone Smart Enough To Listen)
Suze Orman's Women & Money (And Everyone Smart Enough To Listen)
A Master Class on SEP IRA vs Solo 401ks
00:31:27
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July 12, 2026. Welcome everybody to the Women and Money podcast, as well as everybody smart enough to listen. Today is Suzy school, and you are going to get out your Suzy notebooks. Do you hear me? And the reason is very simple. You are going to want to write down everything I am going to tell you today, period. Just know that. But before I begin that, what I want to say is this. The markets are crazy. They're up, they're down. None of you are going to own a stock that goes straight up in this type of an environment. None of you are going to own a stock that goes straight down and doesn't return to go back up again. If you have listened to the kinds of stocks and ETFs that I've been talking about. So don't look at your portfolio every single day and go, oh my God, this is down. It's down more. It's down even more. Listen to me and listen to me closely here. You are not to be investing in the stock market unless you have at least five or ten years or longer till you need this money, minimum of five or six. All right? And therefore, what good does it do you for these markets to go up and up and up on paper? Because you haven't cashed out yet when you're not going to cash out. And your dollar cost averaging, which means your dollars are buying less shares because of what you're buying, is more expensive. So when things go down, things that you want to own, own, that is the time that you really want to dollar cost average, once a month, every three months, whatever it may be. So this is not the time to freeze. This is not the time to sell. This is not the time for you to think that you're going to outsmart these markets. You will never outsmart these markets. These markets will always teach you what you need to know. Which is what? Consistency. The sooner you do something, the better. The longer you hold the the better, especially if it's a good quality ETF and or stock bond, whatever it may be. So just you be consistent in a time when this world could not be more inconsistent if it tried. So as long as we're still at war, we're out of war, we're back in war. I'm telling you, nothing will absolutely go straight up or straight down. So just know that. Okay? All right. Are you ready for Susie school to begin? Now, a week ago, and I think it was just a week ago I told you that I would do a susi school on the difference between a SEP IRA and a solo Roth 401. So for those of you who are self employed, this is for you. You're your own boss, whatever it may be. Maybe you're just selling candles on Etsy, maybe you're driving a Ride share on Saturdays, whatever it may be, as long as you don't have any employees and you have a business, you are essentially self employed. So you need to listen up. And you need to listen up to the difference between the Solo Roth 401K and the the SEP IRA. So it is important that you understand the difference because I am here to tell you, you can save either two times, three times, or more seriously as much in a solo 401k versus a sep IRA on the exact same income. So for those of you who have a SEP ira, you have no employees, you best listen up because in most cases you are making a mistake and a solo 401k would be absolutely the way to go. However, there's one other thing you need to listen up and understand. I can hear it now. I can hear it. A lot of you have already heard me say, no, no employees. And you're thinking to yourself, but Susie, I have a helper who comes in a few hours a week or my daughter works summers for me. And you're trying to get around the rules. Possibly. But you need to understand the definition of an employee. And the definition for an employee in these two cases is not a full time employee. What matters is this, how much they work and how long they have been with you. And the two plans. They measure it completely differently. So take notes here. The Solo 401K counts hours. So once someone works 500 hours a year, listen everybody, that's just 10 hours a week for two years running. They're in your plan whether you know it or not. And the solo part, the solo, is over. It's over. You don't qualify anymore for a solo 401k. Remember, a solo 401k means one person, of course, unless the other person is your spouse. So be careful here. The SEP IRA does not count hours at all. It counts years. Somebody works for you in three of the last five years, even just a few hours here and there, it is probable that you will owe that person the exact same percentage you give yourself. So if you're paying yourself 10% of your compensation, you're going to have to give it to them as well. So again, an occasional worker here and there, really you're fine. But be careful because you're steady, part timer of several years. Watch out because you're going to owe them money. And I just have to give you one warning. All right, everybody, I know, I know, because all of you always try to get clever. Do not go calling a real employee a contractor just to protect your plan. That's a trick, everybody. Remember, I always tell you, stand in your truth. That trick, if caught, creates IRS problems that make all of this really look like a picnic for you. So I just want you to understand when I'm saying employees throughout this podcast, exactly what I am talking about. Okay? Are you ready? Let's begin. Here's what I want you to do on a piece of paper in front of you, and you all need to get that out. Now, really, if you don't have it, I want you to draw a picture of two hats. Two hats, they can just be a square, okay? Just think of them as hats, side by side. Under hat number one, I want you to put the word worker, employee under it. Just do that for me for now. Under hat number two, I want you to put the words boss, employer. Just that simple. Now, assuming again, you work for yourself and you don't have any employees, I want you to listen up. When you work for yourself, you. You wear two hats. I want you to think about it. You are wearing the worker hat when you are doing the actual work. You're designing the logos, you're coaching the clients, driving the car, whatever it may be. However, when you sign the checks, make all the decision, pay the taxes, you are wearing the boss hat. So in reality, you always wear two hats, an employer hat and an employee hat. You can think of yourself as the worker or the boss, either one, but you wear both those hats. Now, why do I care and why should you care about these hats? Very simple. Because that is the entire difference between the Solo 401K and the SEP IRA. So the Solo 401K lets both hats contribute, the worker hat and the boss hat. The SEP IRA only lets one hat contribute, and that is just the employer or the boss hat. So two hats are obviously better than one when it comes to contributions because you have both sources contributing. Do you get that? Think about this. Just put a pin in that for one second. Think about the 401k, 403, whatever it may be. As an employee, when you have an employer sponsored plan, you contribute and your employer contributes. When you have an individual ira, only, you contribute. And if you think about that, you get to contribute more in a 401, 403 tsp, whatever it may be, than you do in an individual. Iraq. The same Is true for a SEP IRA only you can contribute versus a solo 401k where you can contribute as the employee and the employer. Does that make sense to you? So therefore, let's begin with what is a SEP ira? A SEP ira, better known just as a SEP stands for Simplified Employee Pension. I want you to notice the words simplified employee pension. Why do they call it that? Because first of all, everybody, it's simple. It takes maybe five minutes to set up. Next, look at the word employee. It is set up for. For the benefit of an employee. And how does an employee benefit? They benefit when the boss puts in money for the employee. Period. The employee cannot put in money, only the boss can put in money. So it is your boss hat when you are setting up a SEP that contributes. So the question is, how much can the boss put in? And remember, if you're self employed and you set up a sep, you are the boss putting in money for your own benefit. But only the boss can put it in. So how much can the boss put in? Write this down. 20 to 25% of your compensation, up to a max of 70%. Now, just so you know, to be able to hit that mark of $72,000, you have to have compensation of anywhere between $288,000 and $360,000 a year, depending on if you're an S corp or a sole proprietor. Just know that that's not a big deal. But that's the whole story for the Simplified employee pension plan, the SEP. So after $72,000 is reached in that plan, that's it, it closes. You cannot put in any more money. There are no catch up contributions, nothing. When you turn age 50, nothing is going to matter except that most people open up. A SEP IRA is its technical name at a brokerage firm where you can buy and sell anything you want. You own control over what's in there. All of that, that's how you normally do it. Okay, I'll get back to that in a second. Now just remember, it's a maximum of 20 to 25% of your compensation that you can put in. And to get close to that $72,000, you are making at least approximately $300,000 a year. Just know that. Let's leave SEPS for one second and switch to the Solo 401K. Now you might want to draw two boxes again. And under this you do the exact same thing as I asked you to do for the sep. Again with the sep. Notice that the only hat that's allowed to contribute is the Employer hat. Let's do the Solo 401K. You have two boxes. An employer box or the boss, an employee box or the worker. All right. And again, for people who are self employed with no employees, you can have your own solo 401k. And by the way, if you, if your spouse works for the business, they can have their own solo 401k as well. Just so you know. So let's look at the contribution limits under the solo 401k. Now under the boss hat it works identical to the boss hat of the SEP IRA. The those two hats, whether it is a SEP IRA or a Solo 401K are identical again, 20 to 25% of compensation up to the same 72,000 overall max identical. No difference there. However, listen closely to me now Unlike the SEP IRA, the Solo 401K does allow the employee or the worker to contribute. So under the worker hat. Now listen closely. Just like in your employer 401k, 403b tsp where you may work or you did work, the Solo 401k works the exact same way. You can put up to write this down under that hat up to $24,500 for 2026 if you're under 50. If you're 50 or older, the catch up contribution is $8,000. So you could put in this year $32,500 in that hat. If you are 60, 61, 62, your catch up jumps to 11,250. Dol you having the ability to put in $35,750. Obviously after the age of 63 it drops back to $32,500. So let's just compare the two. Just let's compare them. In a SEP IRA, let's just say you're an S corp paying yourself $75,000 in W2.1 wages. So 25% which is what you are allowed to put in to accept the Most of that 75,000 is $18,750. That would be your max contribution. Or let's say you're a sole proprietor maybe with $75,000 of net schedule C profit. And for those of you who, who are self employed, you know what I'm talking about. But just listen to me. You could put in about $13,900 max in your SEP IRA. Now let's just look at your solo 401k. The same 75,000 gets the same 18,750 or 13,900 under the boss hat contribution. That doesn't change. However it doesn't stop there. For now, you put your worker hat on. So you can also contribute an additional $24,500 if you're under 50, $32,500 if you're 50 or older, $35,750 if you are 60 to 63. Are you kidding me? And you would add either $13,900 or $18,750 to any of those numbers. So you can now see how many thousands more you could put away in a solo 401k. Did you hear what I just said to you? Why in the world would you be doing a SEP IRA if you. In most cases, I'll tell you why in one second. But for most of you, listen again. That are self employed, whether you are a sole proprietor or a subchapter S, whatever it may be, you are far better off doing a solo 401k versus a SEP IRA to the tune of tens of thousands of dollars more per year. Quizzy time, everybody, because I want to make sure that you get this. This is so important, I can't even tell you. And for those of you who are like, oh, Susie, I can barely fund my IRAs, whether it's a Roth or traditional right now, I can't do anything. You need to listen to this because one day you don't know what the future holds for you, do you? You don't know. So understand the rules now. So if ever you become self employed, you'll know which retirement account to choose. Just that simple. As long as you have no employees, it's just you. This makes sense. All right, now let's just say Diane is a freelance graphic designer. She's 42 and she wants to open a SEP IRA. And her business nets her enough to that her boss hat. Because she is the boss. And that's the only hat that can contribute to a SEP IRA is enough to allow her to contribute $12,000 this year. So Diane opens a SEP IRA. Here's your question. This is an easy one for you. How much can Diane put away for retirement in her SEP IRA this year? Write down your answer and you should have written down $12,000. Now, same Diane, same income, same year, same age. But this time, Diane opens a solo 401k instead. How much can Diane now contribute totally to her solo 401k? Write it down. Now, I'm going to give you a few minutes here because remember, In a solo 401k, she has two hats. The boss hat, which she can put in $12,000. But the worker hat or the employee hat where she can put in up to X. What is that? Add them together. Did you get it right? The answer is $36,500. Same woman, same business, same exact income, but three times the retirement savings. Once again, why? Because within her solo 401k, she can put in for the employee and the employer. So again, her boss hat puts in the same $12,000 and the worker hat allows her to drop in another $24,500 on top of that. That's how we got to the $36,500 because remember, Diane is under 50. So do you get it, everyone? Now I gave you a hint of who doesn't make Sense for a SEP IRA versus a Solo 401K. And here's the thing. If you're under 50, earning roughly 290 to 360,000, depending if you're an S corp or sole proprietorship, it might make sense for you because it's simple. Same amount of money, whatever it may be. However, everyone else, every age, every income, the solo wins on the math. But the solo also wins in another way. So listen closely here, okay? You know how I feel about Roths. You know, I want your retirement money to grow tax free, have tax free withdrawals, and that is the greatest gift you will always give your future self. You know that. The Solo 401K. Guess what? It can also be set up as a Roth solo 401k. So if you are smart, you open up a Roth Solo 401k, your entire worker hat contribution, every penny of that 24,500 plus depending if you're 50 or older. So the catch ups goes into to the Roth as much as you possibly can put in up to those maxes. However, most firms don't let you put in the boss hat in a Roth. All right? They just don't. However, I think Schwab currently allows you to do that, so you need to check it out before you do so. However, even where you can. And now this becomes complicated. So just listen to me for a second. Even where you can put in the boss hat in a ROTH section, and for reasons like I just said, that are too complicated for this particular susi school, you may be better off just maxing out the boss hat in a pre tax anyway. And to just make it simple, this is because of something known as the QBI deduction and it's a tax break many business owners get. So here's what I want you to do. Especially if you're making larger amounts of Money, talk to your CPA and see if it makes sense to designate the employer, your boss hat money to the pre tax side or to the Roth. And in case you have to designate it to the pre tax side, remember, pre tax isn't a life sentence, it's a conversion waiting to happen. And you will convert it in lower income years, like a slow business year, a sabbatical, the gap years, whatever it may be. Got that? So those are the two differences. I just want to take one more minute of your time, maybe five, we'll see and talk about a SEP ira. Because many of you may choose to still do a SEP IRA. Now, even though the Secure Act 2.0 says legally you can set up a SEP Roth IRA, I don't know of any brokerage firms really that allow you to do so. And I think a lot of that has to do with the QBI and everything that I just mentioned before. However, you can set up a SEP ira, put money into it, obviously it's pre tax, so you get to take a tax deduction. You immediately, however, if you want can then convert it to a Roth ira. No income limitations, nothing. And even though you're going to owe tax on that money, you got a deduction when you put it into the sep. So basically it will offset it when you then convert it. That's a way to get a lot of money, more than a Roth IRA to begin with or whatever, into a SEP IRA that can then convert to a Roth ira. Got that? So this really is just one last thing that I want to say. Half of you listening have a day job. You have an employer sponsored plan such as a 401k, 403b whatever it may be, okay? And you have a side hustle, a side business that you've started on your own and that business may be taking off. Maybe you're an influencer, who knows what you are. And you, you are making a lot of money in that side business. Besides what you are making at work, your worker hat limit that $24,500 or more depending on your age. Remember, if you're 50, it's more. If you're 60 to 63, it's more is per person, not per plan. So maybe you're doing great again at work and you want to open up a solo 401k. If you max out the 401k at your day job, then your worker hat is done for the year, period. You cannot put one more dime into the worker hat into your solo 401k. However, here's what you need to get your boss hat. Limits are separate for each each business. So even after you've maxed out at work, you have that side business, whatever it may be, you can still open a solo 401k and make the boss hat contribution to your solo 401k or solo Roth 401k if your CPA says it's okay. So that is a whole extra hat, so to speak, to help you with tax, advantage, savings. And most people don't even know the door exists. So you need to understand that. Now, just one exception, I just have to say government workers, if you're listening, if you have a 457, it has its own separate limit, so it doesn't count against your worker hat. So even if you max out at work with that, you start your own Solo 401K. You can max out if you want your worker hat in that as well. Did I just confuse the heck out of all of you? It's actually very, very simple. So you have to think about this, everybody. Here's the bottom line. For most of you working for yourself, as long as you don't have any employees, please choose the solo 401k Roth for the worker hat and pre tax or after tax for the boss hat, depending on what your CPA says. Just make sure you open it by December 31st. That's the deadline for the year to open one up. Now, whichever plan you choose, just remember the plan is just the container. What makes you secure is what you put in it month in and month out and leave it alone to grow. Now, hopefully you seriously understand the difference between a SEP IRA and a Solo 401K. And I think hands down, the absolute way to go is with in most cases, a Solo 401K. Now you know. So there's only one thing that I want you to remember when it comes to your money, and it is this. People first, then money, then things. Now you stay safe. By the way, don't you miss kt? I do. All right, bye bye.
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