Solo 401(k) vs SEP-IRA

As a small business owner, reviewing the array of retirement accounts at your disposal can be daunting. In this brief, we seek to help business owners sort through these options and identify some opportunities you can discuss with your CPA.

While there are several retirement savings vehicles available to sole proprietors and contractors, the two favorites in terms of flexibility and savings potential are the SEP-IRA and solo 401(k). SEP-IRA’s were the preferred vehicle of choice up until the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. The EGTRRA broadly expanded the features available within a 401(k) plan to the self-employed, offering the same advantages of a conventional 401(k) plan without being subject to the complex ERISA rules intended to protect non-owner employees. As solo 401(k) plans have gained popularity in the past several years, costs and complexity of establishing a plan have been dramatically reduced, making them a robust contender against the more traditional SEP-IRA.

2020 has been a tumultuous year and arguably the most consequential since 1969.  While the year’s uncertainties could have paralyzed us all, Americans pressed forward.  The stock market’s recovery from the March lows and strong gains for 2020 certainly point to investors’ willingness to look beyond the challenges of the day and toward a robust economic recovery.  We too remain hopeful for the future and for long-term investment gains for investors who can endure volatility and appreciate how ingenuity and determination are powerful offsets to even the most daunting of obstacles.  These investment principles certainly applied in 2020, and as we know, history tends to repeat itself.

This summer, the financial markets sprinted ahead at a record pace. Improved treatments for COVID-19, the prospects of a vaccine, and hopes for a V-Shaped economic recovery brought retail and institutional investors out in force. Small investors, many of whom were sheltering in place, opened millions of accounts at new online trading entrants such as Robinhood and Webull. While many of these first-time investors chased the stock of the day, others became active in financial derivatives, or as Warren Buffett calls them “weapons of mass financial destruction.” Not to be outdone, some institutional investors were active in the derivatives markets as well. Softbank, a Japanese conglomerate, reportedly bought $4 billion of call options tied to a basket of high-profile tech stocks. Many believe this unusually large derivatives activity contributed to August’s strong gains, particularly among large-cap tech stocks.

The shifting landscape for commerce (e.g., bricks to clicks), record unemployment, and the number of businesses that have permanently closed due to COVID-19 creates a degree of economic uncertainty we have not seen since The Great Recession of 2007-09.  In this commentary, we will discuss some of these economic challenges, assess how the markets responded in the second quarter, and highlight a few of the most pressing threats and opportunities for investors.  

 Included in this issue:

Fighting Covid-19

Another Great Challenge

The Storm Beneath the Broader Markets’ Calm

The Federal Reserve Just Did What?

With Rates So Low What Do Investors Do With Their Cash?

Can I Count on These Dividends

As Many Have Concluded, “the Stock Market Is Not the Economy”

All Eyes Are on 2021 Earnings (and the elections in November)

Some Welcome Constants

Confronted with the challenges of COVID-19 the Federal Reserve has taken unprecedented actions, including a commitment to buying U.S. Treasuries, municipal, and most recently corporate debt.  The chart below depicting the expansion of the Federal Reserve balance sheet highlights the scale of these efforts.