Choosing a Self-Employed Retirement Plan

Confused about which retirement plan is best for you as a self-employed person? Here's help.

Sally Herigstad
Sally Herigstad
Apr 19, 2014 at 10:00AM
Investment Planning

One advantage of being self-employed is that you have more say over the type of retirement plan you use. You're not limited to the 401(k) or whatever retirement plan that your employer offers.

Too much choice can be confusing, however. There are so many plans and so many rules. If you need a retirement plan but don't know the difference between a SEP and a SIMPLE, read on.

Compare self-employed retirement plans
The three basic types of self-employed IRAs are simplified employee pensions (SEPs), savings incentive match plans for employees, (SIMPLEs), and one-participant 401(k) plans.

All three plans allow you to deduct your contributions and let your earnings grow tax-deferred. You pay tax in retirement when you withdraw the money. The one-participant 401(k) plan, however, also offers a Roth option.

A SEP IRA is a written arrangement that lets employers or self-employed individuals contribute to a SEP IRA. SEP IRAs are subject to the withdrawal and tax rules of traditional IRAs. SEP IRAs are easy to set up and have low administrative costs. 

A SIMPLE IRA is a tax-favored retirement plan that small employers or self-employed individuals set up for their employees. Contributions must go to a SIMPLE IRA. They cannot be added to your existing IRA. If you have employees who generally earn $5,000 or more per year, you may be required to contribute to their plan. You generally match employee contributions up to 3% of their compensation, although you may choose to contribute as little as 1% of employee compensation under certain circumstances.

A one-participant 401(k) plan, also known as a solo 401(k), is a traditional 401(k) plan for a business owner, or for the owner and his or her spouse. If you choose the Roth option for your 401(k) plan, you don't get a deduction when you make the contribution. However, you take the money out in retirement tax-free.

The main differences between the three plans lie in the amount you can contribute and the requirements for contributing to the plans of your employees. The following limits apply to 2014:




One-Participant 401(k) Plan

Maximum Contribution

20% of self-employed income after SE tax, up to maximum $52,000 contribution

$12,000 from employee (or $14,500 if age 50 or older) plus employer match of up to 3% of wages

$17,500 from employee (or $23,000 if age 50 or older) AND up to 100% of self-employed income after SE tax. Total contribution cannot exceed $52,000.

Employer Matching Requirements

You must contribute the same percentage to any eligible employees

You must match employee contributions up to 3% of compensation

You must contribute the same percentage to any eligible employees

Deadline for Setting Up Plan

Due date of your business return, including extensions

Oct. 1 of tax year

Dec. 31 of tax year

SE tax = self-employment tax.

As a rule of thumb, if you have no employees and want the easiest plan to administer, the SEP IRA is a good bet. If you want to contribute the absolute maximum to your plan, you may prefer the one-participant 401(k) plan.

If you have employees and you want to limit your responsibility for contributions, you may be better off with the SIMPLE IRA.

As a self-employed person, another option is to contribute to your traditional or Roth IRA if you qualify. However, the maximum contributions to an IRA are comparatively low -- $5,500 per year, or $6,500 if you are age 50 or older, for 2014.

Opening a self-employed retirement plan is not difficult. It's worth the trouble to have a plan that lets you contribute more and watch your retirement accounts grow.