A self-employed taxpayer (age 52) wants to maximize retirement contributions. They have net schedule C income of $300,000. They are considering a SEP-IRA vs. a Solo 401(k). Assume the maximum defined contribution limit is $69,000 and the catch-up contribution limit is $7,500. Which option allows the higher total contribution?

Answer options:

SEP-IRA

Solo 401(k)

Both are exactly the same.

Neither allows contributions over $23,000.

How to approach this question

Compare components. SEP = Employer only. Solo 401(k) = Employer + Employee + Catch-up.

Full Answer

B.Solo 401(k)✓ Correct

SEP-IRA contribution is limited to the employer portion (20% of net self-employment income). Solo 401(k) allows the same employer portion PLUS the employee elective deferral ($23,000) PLUS the catch-up contribution ($7,500) since age > 50. Therefore, Solo 401(k) permits a higher total.

Common mistakes

Forgetting the catch-up contribution or the employee deferral component of the Solo 401(k).

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