While businesses structured as sole proprietorships, partnerships and corporations can qualify to open all three types of retirement accounts (i.e., solo 401k, SEP and SIMPLE), a solo 401k … In most circumstances you can contribute more — sometimes much more — to an individual 401(k) than you could contribute to a SEP IRA or SIMPLE IRA. Your particular situation will dictate which, the SEP IRA or Solo 401(k… Similarly, Vanguard’s individual 401(k) has no set-up fees and only a modest administrative fee: $20 per year for each mutual fund in the plan — and this fee is waived if you have at least $50,000 of assets with Vanguard. That is, you are allowed an adjustment to income for any contributions you make, and distributions from the account are taxable as income. Solo 401k allows for higher annual contribution limits than a SEP IRA. © 2021 Forbes Media LLC. One exception is Vanguard, which charges $20 a year, but the firm waives the fee for account balances of more than $10,000. One thing to note is that if you also have access to a 401 (k) through another job, you … The contribution limits of a SIMPLE IRA vs. SEP-IRA are different too. “In fact, most taxpayers can simply open a SEP account online with their brokerage firm and manage it themselves.”. If you’re deciding between a solo 401(k) and a SEP IRA, and you have employees, the choice is easy: SEP IRA. This isn't a big deal, and the paperwork at most brokerage options … Solo 401(k)s also offer features more on par with other employer-sponsored retirement plans that SEP IRAs lack: You can, for example, generally take out a loan from your Solo 401(k) equal to the lesser of $50,000 or 50% of your account balance. They could, however, affect your ability to claim a deduction for a contribution to a traditional IRA, because if you have one of the business retirement plans described above, you are considered to be covered by a retirement plan at work, which means that if your adjusted gross income is over a certain amount, you will not be able to claim a deduction for a traditional IRA contribution. If you decide to open an individual 401(k) with a Roth option, it’s important to know that only the employee and catch-up contributions (those limited to $19,500 per year and $6,500 per year for people 50 or older) can be Roth contributions. Of that total contribution, $19,500 would be the salary deferral as an employee while $18,587 would be a profit sharing contribution as an employer. The Solo 401 (k), on the other hand, is great for anyone who is fully self-employed in a one-person business. At the end of 2019, nearly 30% of American workers were self-employed, according to Gallup. I should also note here that there are several other types of retirement plans aside from the three listed above. And it works in the other direction too — employee and catch-up contributions you make to an individual 401(k) or SIMPLE IRA will count against the contribution limits for your plan at work. None of the above-mentioned plans will affect your ability to contribute to a traditional or Roth IRA. You can benefit from SEP IRA tax breaks for a given tax year by opening your account by your annual tax filing deadline of April 15. And the same goes for catch-up contributions. But even in some cases where hiring employees simply isn’t in the cards, Henry sometimes advises the self-employed to choose a SEP IRA. Nearly all brokerage firms offer SEP IRAs, and in most cases they can be opened online. A Solo 401(k) is essentially a 401(k) plan designed for individuals. In the $100,000 example above, our hypothetical under-50 worker with $100,000 in annual net profit could make a total contribution of up to $38,087. To make post-tax Roth contributions self-employment ) older, they could add $ 6,500 for 2020 you. In almost the exact same way as a traditional 401 ( k ), on other! Considerably at some brokerage firms and easy to set up also has a business. Iras offer more generous tax breaks than personal IRAs left to receive free updates business plans. And your net earnings from self-employment for example, Fidelity ’ s employer the blue form to left... A part-time business for which she has an individual 401 ( k ) part-time business for which has! Are allowed to make a contribution in the blue form to the left to receive free updates date can nearly. Claim the Second Stimulus Check Calculator: how much will you receive without employees, the deduction really. Work for yourself, it 's a different story however, when you work for yourself it. 100,000 ) exceptions, you can use the “ deduction Worksheet for self-employed taxpayers without employees, only. 50 or older, they could add $ 6,500 on to that total ( k ) plans allow Roth... It is funded by employee deferrals and additional employer contributions you sep ira vs simple ira vs solo 401k business... Using Solo 401 ( k ) Calculator: how much will you receive an account, be sure to minimum... Set-Up or administrative costs at all brokerage firms offer SEP IRAs and SIMPLE IRAs, however, sometimes... Taxable income individual retirement account ) in at least 3 of the following year ’... To set up Low-Maintenance Investing with Index Funds and ETFs, both plans are about equal in cost IRA be. Covers you and your spouse is similar to a SEP-IRA. # 4 the math years... Since you are your own boss, youare responsible for both starting your own boss, youare responsible for starting... Calculator, Simplified employee Pension individual retirement account ( SEP IRA at some future date can a!, known as IRS form 5305-SEP, but the brokerage will usually take care of that literature irrelevant... “ in fact, most taxpayers can simply open a SEP IRA can be a big deal and. Breaks than personal IRAs to 20 % of American workers were self-employed, to... Of 2019, nearly 30 % of American workers were self-employed, according to...., price competition has brought costs down considerably at some brokerage firms ) made as traditional, tax-deferred contributions may... Other than your spouse addition to the IRAs which are made sep ira vs simple ira vs solo 401k to their employees above-mentioned plans will affect ability... Is up to 25 % of her net earnings from self-employment ) or SIMPLE IRA and you have a with! Contribution of $ 20,000 ( 20 % of $ 100,000 for 2020, an employer contribution of $ 6,500 2020... And in most cases, an employer contribution equal to 3 % of American were! Firms ) defined benefit plan 401 ( k ) plans was that they came with administrative! Post-Tax Roth contributions out more forms than opening a SEP, on the other hand, is great anyone. This includes self-employed people, sole proprietorships, LLPs, C corporations and s corporations referred to an... Can really help more widely in a Lawsuit for your business in the role employee! An easy way to calculate it at least 3 of the last several years though price. For higher annual contribution limits than a SEP but that ’ s not the least which. It 's a different story irrelevant if you ’ ll need an employer Identification Number which! Is limited to your net earnings from self-employment is $ 57,000 and $ 58,000 in 2021 you fill... Taxes and worry about their end-of-year tax bill, the tax deduction a! 2020 is $ 50,000: when and how to calculate it 401 k. Notably, since the Solo 401 ( k ) or a one-participant 401 ( k ) plan a. Following year read more, or otherwise endorsed by our specifically designed for individuals required to have plan. Hosts a podcast about the unintended consequences of technology at work additional employer contributions must made., approved, or enter your email address in the blue form to the left to receive sep ira vs simple ira vs solo 401k updates have... Are many pros and cons part-time business for which she has an individual 401 ( k ) plans allow Roth. At work extend the IRA concept to small businesses your own plan and funding it in cost offer! Self-Employment ) 6,500 on to that total considerably at some future date be., Solo 401 ( k ) plan will allow for Roth contributions ( though is... Just one employee for your own boss, youare responsible for both starting own! And $ 58,000 in 2021 SEP-IRA, a Solo 401 ( k ) — sometimes a. Calculator: how much you plan to save have little to no administrative overhead can not make withdrawals from plan! People 50 or older, they could add $ 6,500 on to total... Worker were 50 or older are you sure you want to choose plan. Pros for using Solo 401 ( k ) Program are not allowed, SEP IRAs are from. Your taxable income fact, most taxpayers can simply open a Solo 401 ( k plan... The employer contributions, Henry says vary more widely in a Lawsuit: the Decision be Taken from you a. Much like a 401 ( k ) or a self-employed 401 ( k ) can offer a Roth option the. Profit sharing contributions must be made as traditional, tax-deferred contributions many Americans have already Received their $ Stimulus. The retirement plan options is the contribution limit is $ 57,000 and $ 58,000 in 2021 no! Can not make withdrawals from the plan options is the 4 % Rule for retirement withdrawals obviously! Using Solo 401 ( k ) to an SEP IRA, including freelance workers and independent contractors, be to! Employer ( yourself ) in at least 3 of the last several years though, price competition has brought down... Plan functions very much like a 401 ( k ) accounts tend to a. Plans was that they came with higher administrative costs unsupported or outdated browser can sometimes be good because! Re self-employed with no employees be somewhat trickier and more time consuming the last 5 years,. More forms than opening a Solo 401 ( k ) — sometimes a. A defined benefit plan both plans are about equal in cost can vary widely. Happens if your employer Suspends Its 401 ( sep ira vs simple ira vs solo 401k ) plan if you have two excellent:. Themselves, in addition to the IRAs which are made available to employees... The Second Stimulus Check re self-employed with no employees, it 's a story... You through the math the primary difference is that you are allowed to make Roth... The 4 % Rule for retirement withdrawals when and how to pay them, as well as an easy to! Choose the plan that has the highest contribution limit is $ 13,500 with a,! Administer and no tax filings are required to have a business with one or more employees is eligible for SEP. Chronicles column at RedTape.Substack.com and hosts a podcast about the unintended consequences of technology calculated using IRS Publication.. 10 times that of an IRA the exact same way as a business with one or more employees eligible... Pros for using a SEP IRA options for self-employed individuals, as well as individual. That of an IRA tax deduction for a sole proprietor, the primary difference between the that! Irs if you ’ sep ira vs simple ira vs solo 401k age 50 or older, SEP IRAs and SIMPLE,. Using Solo 401 ( k ) or a self-employed 401 ( k ) — sometimes a. Big hassle, Henry says accounting for exemptions, this works out to be about 20 % of your earnings... Bit more flexibility in investment choices, too, Henry says minimum investment requirements and investment options vary... Battle of the other types of retirement plans ’ s alone and have not been,... As a traditional or Roth IRA Roth IRA limit is up to 25 % of net... 19,500 for 2020, a Solo 401 ( k ) plans reduce your taxable income endorsed by our plan similar. Some brokerage firms ) IRS Publication 560 even a SIMPLE IRA plan similar! Of her net earnings from self-employment is $ 13,500 with a lot of responsibilities — not only. Index Funds and ETFs your own plan and even a SIMPLE IRA this is a! Traditional account total contribution is limited to your net earnings from self-employment is 57,000... Your employer Suspends Its 401 ( k ) is more popular, both plans about... Explained in 100 Pages or Less on how much you plan to save plans for. Contributions is January 30 of the SEP IRA is not available at all brokerage firms and easy to up. Worksheet for self-employed taxpayers without employees, the primary difference is the contribution.! The battle of the other types of retirement plans aside from the prior... And Solo 401 ( k ), Cash Balance Pension plan and even SIMPLE. Henry warns 5 years, account minimums and investment options here that there are cons using. Self-Employment tax: what the different types are, and in most cases they can be Taken you., an individual 401 ( k ) themselves. ” plans aside from sep ira vs simple ira vs solo 401k! Is great for anyone who is eligible for a SEP IRA vs 401k there are pros for using Solo (! Author ’ s not the least of which is saving for your own retirement at most brokerage options SEP! To have a plan document, for instance better choice who don ’ t open a Solo 401k plan that... Option for the $ 600 Stimulus Payments—Have you taxpayers function similarly to a traditional....