401(k), SIMPLE IRA, SEP IRA

If you are self-employed or own a small business, then you may be wondering what retirement savings options are available to you. In the following guide, we provide a comparison of three advantageous retirement plans for self-employed individuals and small business owners: solo 401(k), SIMPLE IRA, and SEP IRA. Keep reading to learn more about the features of each plan, as well as the pros and cons of each.

A solo 401(k) plan, also known as a one-participant 401(k) or a solo K, is a great retirement savings option if you own your own business without having employees beside your spouse.

Let’s take a look at some of the key features of a solo 401(k):

• You can set up your solo 401(k) to operate as a traditional or Roth plan.
• There are no age or income restrictions for the plan.
• You must not have any employees for your small business other than your spouse in order to participate.
• You can contribute all of your salary to the plan up to the annual maximum contribution limit.
• You can save up to $22,500 annually (for 2023) as elective deferrals.
• You can take employer matching contributions with the plan; your business can contribute up to 25% of its profits to your solo K up to $66,000 annually (for 2023).
• The IRS considers both employee and employer contributions for annual contribution limits to the solo K plan.
• If you are age 50 or older, you may contribute $7,500 as a catch-up contribution (for 2023), in line with catch-up contribution limits of other 401(k) plans. The total annual contribution limit for those age 50 or older is $73,500 (for 2023).
• Your total employee contributions to all 401(k) plans, including your solo K, must not exceed the annual maximum contribution, which is $22,500 (for 2023).
• Even if you have maxed out your employee contributions to your 401(k) plans, you can still make an employer contribution to your solo K, exceeding the smaller, employee-only contribution amount.

• Employees can contribute all of their salaries, not just the 25% limit of other plans like the SEP and SIMPLE plans, allowing high-earners to save more.
• You can contribute to other 401(k) plans, as well as an IRA, in addition to your solo 401(k).
• You can set up your solo K at the financial institution of your choice.
• You’ll find the contribution limits are higher and more flexible than those of a traditional 401(k).

• As with other 401(k) plans, you will be hit with taxes and penalties from the IRS if you withdraw funds before age 59½.
• You will be required to fill out a fair amount of paperwork to open a solo K. (It’s not something you can open online within fifteen minutes.)
• Once you exceed $250,000 in assets at the end of the year, you will be required to file a special form with the IRS annually.

Now let’s take a look at the SIMPLE IRA.

SIMPLE stands for Savings Incentive Match Plan for Employees, and it’s a viable retirement savings option for employers and the self-employed with no more than 100 employees earning $5,000 the previous year.

SIMPLE IRAs give employers a simplified way to offer a retirement savings plan to their employees without the administrative hassle of a traditional 401(k) plan.

Here are some key features of the SIMPLE IRA:

• You can set up your SIMPLE IRA to operate as a traditional or Roth plan. With the former option, contributions are made tax-deferred. With the later option, after-tax contributions grow tax-free, and qualified withdrawals in retirement are tax-free.
• You can contribute up to $15,500 (for 2023), and if you are age 50 or older, you can make a catch-up contribution of up to $3,500 (for 2023).
• Employers must contribute to their employees’ SIMPLE IRA plans by either 1) matching employee contributions dollar-for-dollar up to 3%; or 2) contributing 2% of employee wages up to the annual limit of $330,000 (for 2023).
• If you withdraw funds from a traditional SIMPLE IRA before age 59½, you may be subject to a 10% bonus penalty, plus a 25% levy in special circumstances.
• If you withdraw funds from a Roth SIMPLE IRA before age 59½, you won’t be taxed on contributions withdrawn, but you will be taxed on earnings.
• The Roth SIMPLE IRA was created in 2023 as a part of the SECURE Act 2.0.
• You can set up automatic paycheck deductions with a SIMPLE IRA, as you would with typical 401(k) plans.
• You must begin taking required minimum distributions from your SIMPLE IRA by age 73.
• You can set up a SIMPLE IRA if you are the owner of a business employing no more than 100 people, including sole proprietorships.
• SIMPLE IRAs offer immediate vesting of employer contributions for employees; the money is legally theirs as soon as it is deposited into the account.

• Save money tax-deferred or tax-free. With a SIMPLE IRA, you get to choose whether you want to make tax-deferred contributions or after-tax contributions that grow tax-free and aren’t taxed upon withdrawal in retirement, just like a traditional or Roth 401(k).
• Make larger contributions than with either traditional or Roth IRAs, as well as traditional 401(k)s.
• Employees enjoy immediate vesting on any employer matches.

• SIMPLE IRAs are only available to small employers with 100 or fewer employees.
• Employers are required to fund their employees’ SIMPLE IRA accounts every year.
• SIMPLE IRAs are subject to taxes and penalties for early withdrawal, just as with traditional 401(k)s and other 401(k) plans.

Finally, let’s take a look at SEP IRAs.

SEP stands for Simplified Employee Pension, and this retirement savings plan is yet another great option for employers, including those who are self-employed.

• You can choose whether you will contribute tax-deferred money or allow your after-tax money to grow tax-free and withdraw the funds tax-free in retirement.
• SEP IRAs are easy to set up and require minimal paperwork from the IRS.
• Employees are granted immediate 100% vesting into all contributions. Make larger contributions than what you could contribute to either a traditional or Roth IRA, or a 401(k) plan.
• Enjoy flexibility, as you do not have to contribute to an SEP IRA every year, either for yourself or for your employees.

• The SEP IRA requires employer contributions, even though employees cannot contribute to the plan. You must offer your employees the same percentage of employee compensation as you do for yourself.
• No catch-up contributions are available for SEP IRA participants who are 50 or older, as with other IRAs and 401(k)s.
• As with other traditional IRAs and 401(k)s, you will be subject to taxes and a 10% bonus penalty for early withdrawals before age 59½. With a Roth SEP IRA, you won’t be taxed or penalized for early withdrawals of contributions, but you will be for early withdrawals of earnings.