While contribution limits are an essential difference between the three self-employment retirement plan options, they should not be the only consideration. Ease of set up and operation, flexibility, and reporting requirements are just a few of the key variables to these plans that should be acknowledged and considered prior to decision making. Each self-employed individual is unique in their needs and capacity to take on additional responsibilities, like annual reporting.
| Type of Account |
Pros |
Cons |
| SEP IRA |
- Easy to set up and operate
- Low administrative costs
- Flexible annual contributions
- Generally, no filing requirements
|
- Employer must contribute equally for all eligible employees
- Employer contribution only
- Participant loans not permitted
|
| Solo 401(k) |
- Contributions can be made as an employer and employee
- Owner can contribute 100% ("earned income") up to the annual contribution limit
- Employer nonelective contributions up to 20% of compensation as defined by the plan for sole proprietor or Schedule C taxpayer
"Earned income" - defined as net earnings from self-employment after deducting both: one-half of your self-employment tax and contributions for yourself
|
- Nondiscrimination testing required as soon as there is another employee
- If employees are hired and meet eligibility requirements, the employer must include them in the plan and their elective deferrals will be subject to nondiscrimination testing
- A 1-participant plan is generally required to file an annual report on Form 5500-EZ if it has $250,000 or more in assets at the end of a year
|
| SIMPLE IRA |
- Inexpensive to set up and operate
- Employees share responsibility for their retirement
- No discrimination testing required
- Employees may contribute in addition to employer contribution
- Generally, no filing requirements
|
- Inflexible contributions
- Lower contribution limits than some other retirement plans
- Employer must contribute
- Participant loans not permitted
|
Retirement plan options are not one-size-fits-all, so it is important to weigh all your options and make an informed decision based on your individual goals and needs. If you are self-employed and want to learn more, please contact a One Day In July advisor.
