{"id":1346,"date":"2021-10-27T13:34:00","date_gmt":"2021-10-27T13:34:00","guid":{"rendered":"https:\/\/moneymade.wpenginepowered.com\/?p=1346"},"modified":"2025-06-03T15:37:42","modified_gmt":"2025-06-03T15:37:42","slug":"solo-401k-vs-sep-ira-simple-ira","status":"publish","type":"post","link":"https:\/\/moneymade.io\/learn\/articles\/solo-401k-vs-sep-ira-simple-ira\/","title":{"rendered":"Solo 401(k) vs SEP IRA vs SIMPLE IRA: Which is Best for You?"},"content":{"rendered":"\n

If you’re self-employed or a business owner, saving for retirement is hard. Getting a solo 401(k), SEP IRA, and SIMPLE IRA can speed up the process.<\/strong><\/p>\n\n\n\n

\"Solo<\/figure>\n\n\n\n

If you\u2019re among the ranks of the world\u2019s self-employed, we salute you. Your choice to invest time and money into a company of your own is evidence of true self-worth (not to get too woo-woo). A profitable business could also pay off tenfold for you one day\u2014we certainly hope so.<\/p>\n\n\n\n

Outside of hustling hours, every good mogul needs to think about their long-term financial well-being. Traditional employees have the benefit of an employer-sponsored 401(k), but self-employed people can open a Solo 401(k), SEP IRA, or a Simple IRA as an alternative(s).<\/p>\n\n\n\n

All three retirement accounts have similar benefits, but their differences make each one uniquely fit for certain kinds of entrepreneurs and business owners. Let\u2019s dive into each.<\/p>\n\n\n\n

Many companies on MoneyMade advertise with us. Opinions are our own, but compensation and in-depth research determine where and how companies may appear. See disclosure.<\/p>\n\n\n\n

What is a Solo 401(k)?<\/h2>\n\n\n\n
Solo 401(k) pros<\/strong> Allows $6,500 in catch-up contributions for people over 50 Allows matching contributions up to 25% of your net earnings from self-employment Total contribution maximum of $57,000 Traditional (pre-tax) or Roth (after-tax) options exist<\/td>Solo 401(k) cons<\/strong> Only for solo-preneurs with zero employees (other than a spouse)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

The solo 401(k) is exactly what it sounds like. Sometimes called a one-participant 401(k)\u2014or \u201cuni-k\u201d for short\u2014this plan covers a business owner with no employees. If the individual business owner is married, the solo 401(k) plan will also cover their spouse.<\/p>\n\n\n\n

Solo 401(k) plans have the same rules and requirements as employer-sponsored accounts. The business owner gives themselves a paycheck and, from it, makes 401(k) contributions up to the annual limit. In 2021, the limit is $19,500 or $26,000 for people over 50. The business owner can then turn around and make employer contributions (aka employer matching) up to 25% of their salary.<\/p>\n\n\n\n

For example, let\u2019s say Sam owns an S Corporation and pays themselves a salary of $78,000. Every year, they contribute 25% of their salary, or $19,500, to their Solo 401(k). They can then match their own contributions as the employer, bringing their total year\u2019s contributions to $39,000. Pretty sweet, right?<\/p>\n\n\n\n

What is a SEP IRA?<\/h2>\n\n\n\n
SEP IRA pros<\/strong> Available to businesses of any size Easy to file and open Employee is always 100% vested<\/td>SEP IRA cons<\/strong> Only employers are allowed to contribute Lower annual contribution limits compared to Solo 401(k)s<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

The acronym \u201cSEP\u201d stands for \u201csimplified employee pension.\u201d Self-employed people and businesses of any size can establish a SEP.<\/p>\n\n\n\n

Only employers contribute to SEP IRAs. Annual contributions can\u2019t exceed 25% of the employee’s compensation, or $58,000 (in 2021)\u2014whichever is smallest.<\/p>\n\n\n\n

Just like the \u201cgood-ol\u2019 days\u201d of pensions, the employee is always 100% vested in their SEP-IRA money.<\/p>\n\n\n\n

What is a SIMPLE IRA?<\/h2>\n\n\n\n
SIMPLE IRA pros<\/strong> Allows $3,000 in catch-up contributions for people over 50 Required 2% employer contribution (based on salary) or 3% match Easy to set up Inexpensive Employee is always 100% vested<\/td>Simple IRA cons<\/strong> Contribution options are a little rigid<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

The IRS loves its acronyms. The acronym \u201cSIMPLE\u201d stands for \u201cSavings Incentive Match Plan for Employees.\u201d SIMPLE IRAs provide a way for both employees and employers to contribute to traditional IRAs.<\/p>\n\n\n\n

SIMPLE IRAs were made for small businesses that wanted to avoid the costs associated with opening retirement plans for their employees. (Believe it or not, there are fees required to open, manage, and educate employees on their retirement plans.) SIMPLE IRAs are popular with small businesses that have 100 employees or less.<\/p>\n\n\n\n

Employees are always vested in their SIMPLE IRAs. Employers are required to contribute a 3% match of their employees\u2019 salaries, or a 2% non-elective contribution based on the employee\u2019s salary (in the case that the employee doesn\u2019t contribute anything) up to an annual limit of $290,000 for 2021.<\/p>\n\n\n\n

Comparing a 401(k) vs SEP IRA vs Simple IRA: Which is right for you?<\/h2>\n\n\n\n

Self-employed folks, entrepreneurs, and business owners alike can benefit from opening a retirement account for themselves and their employees. Here\u2019s a look at how all three of these popular options compare:<\/p>\n\n\n\n

Biggest appeal<\/strong><\/h4>\n\n\n\n

Solo 401(k): <\/strong>Individual entrepreneurs can contribute as both employee and employer, providing an outstanding opportunity to maximize tax breaks on your investment contributions or earnings.<\/p>\n\n\n\n

SEP IRA: <\/strong>Owners of any-sized businesses can provide a retirement benefit to all employees (including themselves).<\/p>\n\n\n\n

SIMPLE IRA: <\/strong>Small business owners with 100 employees or less can provide a lower-cost retirement benefit that both employers and employees can contribute to.<\/p>\n\n\n\n

Who funds them (and how)<\/strong><\/h4>\n\n\n\n

Solo 401(k): <\/strong>You, yourself, and\u2014um\u2014you, contribute pre-tax dollars from your revenue, plus after-tax cash from your self-paycheck<\/p>\n\n\n\n

SEP IRA: <\/strong>Only the employer; employees can’t contribute to a SEP IRA through payroll deductions<\/p>\n\n\n\n

SIMPLE IRA: <\/strong>Both employer and employee; funded by employee payroll contributions and\/or employer contributions.<\/p>\n\n\n\n

How employees qualify<\/strong><\/h4>\n\n\n\n

Solo 401(k): <\/strong>This account isn\u2019t meant for your employees\u2014only for self-employed individuals and their spouses.<\/p>\n\n\n\n

SEP IRA: <\/strong>Employees qualify when they are 21 or older, earn at least $650 in tax year 2021, and have worked for the same employer in at least three of the past five years.<\/p>\n\n\n\n

SIMPLE IRA: <\/strong>There are no age restrictions, but employees must have earned at least $5,000 during any two prior years (they don\u2019t have to be consecutive), and expect to earn at least $5,000 in the current year.<\/p>\n\n\n\n

Contribution limits<\/strong><\/h4>\n\n\n\n

Solo 401(k): <\/strong>Your total \u201cemployer\u201d contributions can’t exceed up to 25% of your self-compensation, or $58,000 for the 2021 tax year\u2014whichever is less. (Bump that to $64,500 if aged 50 or older). And as your own \u201cemployee,\u201d your additional contributions must max out at $19,500 for the 2021 tax year ($26,000 for employees age 50 or older). Contributions are deductible and aren’t required every year.<\/p>\n\n\n\n

SEP IRA<\/strong><\/p>\n\n\n\n