Retirement Savings Options for the Self-Employed: SEP, SIMPLE, and Solo 401(k)

What are the Retirement Savings Options for the Self-Employed: SEP, SIMPLE, and Solo 401(k)?

Self‑employed people and owners of very small businesses usually choose between three common plans: the SEP IRA (Simplified Employee Pension), the SIMPLE IRA, and the Solo (one‑participant) 401(k). Each plan serves different business structures, savings goals, and tolerance for paperwork. Below I summarize how each works, who they suit, practical examples from my practice, and actionable steps to choose and set up the right plan.

Quick comparison — high level

• SEP IRA: Employer contributions only (percentage of compensation). Minimal administration. Good when the owner wants flexible contributions and has few or no employees.
• SIMPLE IRA: Employee salary deferrals plus employer match or fixed contribution. Intended for small employers (100 or fewer employees). Lower administrative burden than a full 401(k).
• Solo 401(k): For owner‑only businesses (and a spouse). Allows employee deferrals plus employer profit‑sharing contributions — often yields the highest potential total contribution if you qualify.

For formal plan details, see the IRS pages for SEP plans, SIMPLE IRAs, and one‑participant 401(k) plans (IRS: SEP, SIMPLE IRA, Solo 401(k)).

How the plans differ in eligibility and employer involvement

SEP IRA

• Eligibility: Any business owner (including sole proprietors, partnerships, and corporations) may establish a SEP and must follow contribution rules for eligible employees. Employers contribute; employees do not make salary deferrals to the SEP itself.
• Employer responsibility: Employer decides contribution amount each year (can be 0% in low years), but if you contribute for yourself you generally must contribute the same percentage for eligible employees. Paperwork is light compared with 401(k).

SIMPLE IRA

• Eligibility: Designed for small employers (typically those with 100 or fewer employees who earned $5,000+ in the prior year). Employees can make salary deferrals.
• Employer responsibility: Employer must either match employee deferrals (dollar for dollar up to a set percent) or make a fixed nonelective contribution for all eligible employees. Required employer contributions make it more predictable but less flexible than a SEP.

Solo 401(k)

• Eligibility: Business owner with no employees other than a spouse. If you hire non‑spouse employees, you generally must convert to a standard 401(k).
• Employer responsibility: The owner acts as both employee and employer: you can take employee elective deferrals and also make employer profit‑sharing contributions. This dual role often allows the largest combined annual contributions.

Contribution mechanics (structure, not annual caps)

• SEP IRA: Employer contributes a uniform percentage of compensation for eligible participants. For sole proprietors this is based on net self‑employment earnings after the deduction for self‑employment tax and adjusted with the employer’s contribution rate.

• SIMPLE IRA: Employee salary deferrals plus mandatory employer contribution (either a matching contribution or nonelective percentage). Employee deferrals reduce taxable income in the year they’re made (unless you use a designated Roth SIMPLE where available).

• Solo 401(k): Two components:

1. Employee elective deferral up to the annual 401(k) elective deferral limit (pre‑tax or designated Roth), and
2. Employer profit‑sharing — typically up to 25% of compensation (special rules apply to owner‑only businesses and self‑employment tax adjustments).

Note on dollar limits: Annual dollar limits (elective deferral caps, catch‑up contributions, and total defined contribution limits) are adjusted by the IRS periodically for inflation. For current limits, always check the IRS plan pages:

• SEP: https://www.irs.gov/retirement-plans/plan-sponsor/sep-ira
• SIMPLE: https://www.irs.gov/retirement-plans/simplified-employee-pension-plan-sep and https://www.irs.gov/retirement-plans/simple-ira-plan
• Solo 401(k): https://www.irs.gov/retirement-plans/one-participant-401k-plans

I recommend locking in the IRS current year limits before finalizing contribution math for tax planning.

Tax treatment and distributions

• SEP IRA: Employer contributions are tax‑deductible for the business and go into traditional IRA accounts (tax‑deferred). Distributions are taxed as ordinary income, and early withdrawals before age 59½ generally incur a 10% penalty (unless an exception applies).

• SIMPLE IRA: Employee deferrals are typically pre‑tax (unless you elect a Roth SIMPLE where available), reducing current taxable income. Employer contributions are deductible to the business. Withdrawals follow IRA distribution rules, with additional restrictions on early withdrawals in the early years of participation.

• Solo 401(k): Offers pre‑tax elective deferrals and often a Roth elective deferral option for after‑tax contributions. The plan can also permit loans (if the plan document allows). Distributions are taxed according to the account type (pre‑tax versus Roth).

IRS references: retirement plan distribution rules, early withdrawal exceptions, and required minimum distribution guidance are available at IRS.gov.

Practical examples (realistic but anonymized)

Example A — Freelancer choosing Solo 401(k):
A freelance web developer earned $120,000 net income and had no employees. By using a Solo 401(k) she made an employee deferral (reducing her taxable income) and added an employer profit‑sharing contribution. Because she could act in both roles she maximized retirement savings that year, combining the two contribution types.

Example B — Owner with a few employees choosing SIMPLE IRA:
A local trade business with 6 employees wanted a low‑cost plan that encouraged worker savings and required modest admin. They chose a SIMPLE IRA and used the employer matching formula. The employer’s fixed obligation made budgeting straightforward.

Example C — Small professional practice preferring SEP IRA:
A physician in private practice who varies income year to year favored a SEP because employer contributions are discretionary. In high‑income years she increased the employer percent; in lean years she made no employer contribution.

From my advising experience, these choices often reflect tradeoffs: contribution potential (Solo 401(k) usually highest), employer cost certainty (SIMPLE), and administrative simplicity (SEP).

Choosing guide — which fits you?

1. Business size and employees

• If you have any non‑spouse employees and want the highest combined contribution potential, evaluate SEP or SIMPLE based on whether you want employee deferrals or predictable employer contributions. If you’re truly owner‑only (plus spouse), the Solo 401(k) is typically a top choice.

1. Contribution flexibility vs. predictability

• Need flexibility? SEP allows skipping employer contributions some years. Need predictable employer contributions? SIMPLE requires employer contributions.

1. Administrative capacity

• SEP: simple paperwork. SIMPLE: low admin but required employer contribution rules. Solo 401(k): more paperwork (annual Form 5500 filing required once plan assets exceed a threshold), plan document and provider setup.

1. Tax planning goals

• If you want Roth (after‑tax) options, Solo 401(k) may allow designated Roth deferrals; SEPs do not. SIMPLE IRA Roth options are limited depending on the provider.

1. Retirement funding target

• If maximizing retirement savings annually is your priority and you qualify, Solo 401(k) often delivers the highest combined contribution ability.

Common mistakes I see

• Not coordinating contributions with payroll and estimated tax payments: For sole proprietors, employer contribution math depends on net earnings after self‑employment tax.
• Forgetting employer obligations for employees: If you contribute for yourself in a SEP, you must generally do so for eligible employees at the same percentage.
• Missing plan setup and deposit deadlines: Employer deposit timing for salary deferrals (SIMPLE) and plan establishment deadlines vary; missing them can create compliance headaches.

How to set up and next steps

1. Decide on the plan type based on eligibility and goals.
2. Select a provider (brokerage or custodian) that offers the plan and document templates.
3. Adopt the written plan by the IRS deadline for the tax year (deadlines differ by plan type).
4. Follow payroll procedures for elective deferrals, deposit employer contributions on time, and maintain records.
5. If plan assets exceed the Form 5500 threshold (currently $250,000 for one‑participant plans in some years — check the latest threshold), file the required annual return.

If you want a side‑by‑side decision worksheet, consider starting with a simple spreadsheet that compares: expected contribution levels, employee count, desire for Roth contributions, and administrative bandwidth. In my practice I use that worksheet to help clients simulate three tax years of contributions and compare projected retirement balances.

Interlinks for further reading

• For deep dive on the SEP structure and pros/cons, see our SEP IRA page: SEP IRA.
• If you’re choosing between SEP and SIMPLE for a small team, read: SEP IRA vs. SIMPLE IRA for Small Businesses.
• For guidance comparing SEP and Solo 401(k) when you’re deciding which maximizes contributions, see: Choosing Between a SEP IRA and Solo 401(k) for Small Business Owners.

Sources and further reading

• IRS — Simplified Employee Pension (SEP) plans: https://www.irs.gov/retirement-plans/plan-sponsor/sep-ira
• IRS — SIMPLE IRA Plans: https://www.irs.gov/retirement-plans/simple-ira-plan
• IRS — One‑participant (Solo) 401(k) Plans: https://www.irs.gov/retirement-plans/one-participant-401k-plans
• Consumer Financial Protection Bureau — Retirement planning basics: https://www.consumerfinance.gov/consumer-tools/retirement/

Professional disclaimer: This article provides general information about retirement plan options for the self‑employed and is not personalized tax or investment advice. Rules and dollar limits change annually; check IRS.gov or consult a qualified tax professional or financial planner before making plan elections or contributions.