Larry McClanahan, Financial Advisor
The primary difference is that an employee can make salary deferral contributions through payroll to a 401(k) plan, while a SEP-IRA can only accept employer contributions.
A few other differences include:
- Between employee contributions (including “catch-up” for age 50+) and employer matching/profit sharing, more can be contributed to a 401(k) plan than a SEP-IRA.
- 401(k) plan can have a vesting schedule for employer matching and/or profit sharing contributions. SEP-IRA is 100% immediately vested.
- 401(k) may include loan provisions. No loans are permitted from a SEP-IRA.
- 401(k) may include hardship distribution provisions. No such opportunity with the SEP-IRA.
- SEP-IRA is less complex and less costly to administer.
I hope that helps.
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