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Home » 401K, IRA's, Retire, Retirement Planning

Self-Employed Retirement Plan Faceoff: SEP IRA vs Solo 401k vs SIMPLE IRA

Last updated by on 4 Comments

While completing my taxes this year, I started noticing that I would have a sizable tax bill due from self-employment income unless I found a way to reduce my taxable income.

Our (my wife and I file jointly) income levels were beyond where I could contribute to a Traditional IRA (phaseout starts at $95K) – so that was not an option. And contributing to a Roth IRA (after-tax) would have defeated the whole purpose of reducing taxable income.

So, after six years of running this blog and having (mostly tiny) side self-employment income beyond my day job, I decided to look in to retirement plans for self-employment income.

I found three options, which I highlighted separately here:

  1. SEP IRA
  2. Solo 401k (AKA a “one-particpant 401k” or “individual 401k”)
  3. SIMPLE IRA

In today’s post, I’ll chart the differences between the three.

Self-Employed Retirement Plan Options

Before I get to which plan I chose to create and why, I compiled a chart that compares the self-employed retirement plans against each other.

SEP IRASolo 401kSIMPLE IRA
Eligibility RequirementsAge 21 or older. Must have worked for the employer (yourself) in at least 3 of the last 5 years. Must have received at least $550 in compensation.No employees (outside of spouse). No age or service restrictions.No age restrictions. Must earn a minimum amount specified by the employer during any 2 preceding years, and expect to earn at least $5,000 in the current year.
Maximum Contributions as Employee (Self-Employed)Personal contribution of up to $5,500 ($6,500 for employees age 50 or older) into an individual SEP-, traditional, or Roth IRA. Income restrictions apply.
$17,500 ($23,000 for employees age 50 or older) for 2013 & 2014. Cannot exceed 100% of compensation.$12,000 ($14,500 for employees age 50 or older) for 2013 & 2014.
Maximum Contributions as Employer (Self-Employed)25% of net earnings up to $51,000 for 2013, $52,000 for 2014. Deductible up to 20%. Annual contributions not required.For self-employed, 25% of net earnings up to $51,000 for 2013, $52,000 for 2014. Deductible up to 20%. Annual contributions not required.Option 1: Match up to 3% of compensation (can be reduced to as low as 1% in any two out of five years) or $12,000, whichever is less.
Option 2: Contribute 2% up to $5,100 for 2013, and up to $5,200 for 2014.
Contributions are required every year.
Roth Option Possible?NoYes (employee contributions). Availability varies by broker.No
Rollover OptionsSEP, Roth, & Traditional IRA's, Qualified pre-tax plans (401k), 403b, 457b.SEP, Roth, & Traditional IRA's, Qualified pre-tax plans (401k), 403b, 457b.SEP, Roth, & Traditional IRA's, Qualified pre-tax plans (401k), 403b, 457b if after 2 years have passed from employee first participation. No waiting period for rollover to another SIMPLE.
Broker AvailabilityHighest availability of the three plans. Most discount brokers have a SEP IRA account option.Lowest availability of the three plans. Roth contribution option varies by broker.Middle availability of the three plans.
Administrative ResponsibilitiesComplete IRS form 5305-SEP (broker handles).
No IRS reporting required.
Annual filing of Form 5500 may be required.
Plan sponsors have various administrative and fiduciary responsibilities.
Complete IRS form 5304-SIMPLE or 5305-SIMPLE (broker handles).
No IRS reporting required.

SEP IRA vs. Solo 401k vs. SIMPLE IRA

self employed retirement plansEveryone’s personal situation is different and there is no single definitive superior retirement plan for every individual who earns self-employment income.

So how do you choose?

Your primary considerations should be:

  1. Do you have a 403b, 401k, or other qualified retirement plan through an employer?
  2. What level of self-employment income do you earn?
  3. How much do you want to contribute?
  4. How much administrative responsibility are you comfortable with?
  5. What are the associated fees and investment options with each plan?

If the answer to #1 is “no”, then the Solo 401k gives you the highest contribution limits, as it effectively combines the $17,500 employee contribution with the additional ability to contribute 25% of net earnings as employer. However, it does have the drawbacks of more administrative responsibility and limited broker availability (and potentially higher costs). If you are not earning at higher levels, the increased contribution limits might not be worth it, with the drawbacks in mind.

From there, it’s a matter of how much you’d like to contribute, availability, fees, and investment options when choosing between a SIMPLE and SEP.

If the answer to #1 is “yes”, then the SEP IRA is the clear cut winner, in my opinion. Keep in mind that any contributions you make as an employee to a Solo 401k or SIMPLE IRA count against the maximum employee contribution limits and are cumulative between accounts, so the $12,000 you could contribute to a SIMPLE IRA as an employee would have no added benefit. You would be better off simply contributing to your employer’s plan for the employee contribution aspect, especially if a 401k match is involved. And for contributions with the status of “employer” the SEP IRA contribution limits are far higher than the SIMPLE IRA limits. SEP’s also have greater discount broker availability and typically more investment options than SIMPLE’s.

Self-Employed Retirement Plan Calculators

It might also be beneficial to use a calculator to help you figure out which plan might result in the most tax deductible contributions for you. Here are a few retirement plan calculators that can lend a hand:

Self-Employed Retirement Plan Discussion:

Which retirement plan do you use for your self employment income? And why?


About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


4 Comments »
  • Joe Retirement says:

    One thing about 401k plans you may not be aware of, albeit a small detail it can be massively helpful in situations like this (think a doctor that is a solo practitioner that is very high income). You don’t just have to run a plain ole 401k style employee contribution/employer match system. You can add a profit sharing and/or defined cash balance element to the plan that allows you to far exceed the $17.5k deductibility limit and still be fully compliant. You would absolutely want to deal with a specialist in the area and not do it yourself as you really don’t want to screw it up. Only applies to people with very high incomes and current tax “problems” (think top tax bracket). Can be huge for them though.

  • Natalie H says:

    Which plan did you choose?

  • There is always the option for a Roth IRA, or just a plain NON deductible IRA. The money grows tax free in a ROTH, much better than a savings account.

    Buy a rental if you want tax deductions.

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