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.

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.

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.

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.

Most Popular

Refunds for $10,200 Unemployment Tax Break to Begin This Month
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Month

The IRS will start issuing automatic refunds sometime in May to people eligible for the unemployment benefit tax exemption.
May 1, 2021
The Benefits of Working Longer
Empty Nesters

The Benefits of Working Longer

Delaying retirement for a couple of years—or even a few months—is the most effective way to improve your retirement security.
April 29, 2021
10 Dividend Growth Stocks You Can Count On
dividend stocks

10 Dividend Growth Stocks You Can Count On

What should investors prioritize in dividend growth stocks? A history of aggressive payout expansion, and the ability to generate enough cash to keep …
May 3, 2021

Recommended

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021
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.
May 3, 2021
The Kip 25: The Best Low-Fee Mutual Funds
mutual funds

The Kip 25: The Best Low-Fee Mutual Funds

The key to building wealth long-term is buying high-quality, low-cost mutual funds run by seasoned stock pickers. Here are our favorites: The Kiplinge…
April 29, 2021
The Benefits of Working Longer
Empty Nesters

The Benefits of Working Longer

Delaying retirement for a couple of years—or even a few months—is the most effective way to improve your retirement security.
April 29, 2021