Advertisement
retirement

Comparing Self-Employed Retirement Plans: Solo 401(k) vs. SEP IRA vs. SIMPLE IRA

Here's how three common retirement savings plans for self-employed workers stack up based on contribution limits, costs and more.

Whether you're a full-fledged small-business owner or you just run a business on the side, there are several smart ways to save for retirement that are specifically designed for the self-employed. Here's a comparison of three popular self-employed retirement savings plans: the solo 401(k), the SEP IRA and a SIMPLE IRA. See which option is right for your retirement planning needs.

Solo 401(k)

Works well for: A self-employed business owner with no employees or a worker participating in an employer’s 401(k) who also has a side business.

Advertisement - Article continues below

How much you can contribute: As an employee, you can contribute up to $18,500 for 2018, plus up to $6,000 extra if you are 50 or older. As a sole proprietor, you can contribute 20% of your company’s net earnings. For 2018, total contributions can’t exceed $55,000 (not counting the catch-up contribution).

Maximize it: If you have a side gig and work for a company with a retirement plan, contribute to both.

How much it costs: There’s usually no annual maintenance fee, but you’ll need to file an annual IRS Form 5500 if your plan assets exceed $250,000.

SIMPLE IRA

Works well for: Self-employed people with fluctuating incomes (such as real estate agents) or a business with 100 or fewer employees. Both employer and employee can contribute.

Advertisement
Advertisement - Article continues below

How much you can contribute: Up to $12,500 in salary deferrals, or $15,500 if 50 or older. Employers match employee contributions up to 3% of compensation, which can be reduced to 1% in any two out of five years. Or an employer can contribute 2% of each employee’s compensation, up to $5,500.

Advertisement - Article continues below

Maximize it: Some firms start out with a SIMPLE IRA and then change to a 401(k) when they have more employees or want to match more than the 3% limit in a SIMPLE plan.

How much it costs: Costs vary by plan provider. Fidelity, for example, charges an annual fee of $25 per participant, or a $350 plan fee.

SEP IRA

Works well for: A small business with only a few employees or a self-employed owner who might have made a nice profit last year but needs more time to establish a plan. (You have until October 15, 2018, to set up a plan for 2017. Other plans must be set up by the end of the year for which contributions are made.)

How much you can contribute: No employee contributions. You as the employer can contribute up to 20% of your net income, to a maximum of $55,000.

Maximize it: Only the employer can contribute. Whatever percentage you select, you must contribute the same percentage of compensation for each employee.

How much it costs: There often is no setup or annual maintenance fee. Check with brokerage and mutual fund companies that sponsor SEPs.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Tax Day 2020: When's the Last Day to File Taxes?
tax deadline

Tax Day 2020: When's the Last Day to File Taxes?

Thanks to the coronavirus pandemic, the 2020 tax deadline was pushed back to give taxpayers (and tax preparers) more time to file returns.
July 14, 2020

Recommended

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
July 9, 2020
Avoid Blindly Following Random Benchmarks on the Road to Retirement
retirement planning

Avoid Blindly Following Random Benchmarks on the Road to Retirement

Unless the benchmark is relevant to your personal plan, it could steer you into taking a wrong turn.
July 8, 2020
Where Should You Retire?
retirement planning

Where Should You Retire?

This week, our Your Money's Worth podcast host Ryan Ermey interviews co-host Sandy Block about her recent story about the best retirement destinations…
July 7, 2020