Comparing retirement plans: 401(k) vs. SIMPLE IRA vs. SEP IRA

LAST REVIEWED Jan 25 2024
10 MIN READEditorial Policy

Saving for retirement has transitioned from the historical, defined benefit pension plan — where your employer took care of the future with a nice pension plan — to more of a “you’re on your own” type of structure. This article will guide you on your quest for a secure retirement by comparing different types of popular retirement plans. Today, unlike during the last century, retirement often rests firmly on your shoulders. It’s unlikely that Social Security will cover all of your future retirement expenses, and thus it’s up to you to figure out which type of plan is the best home for your precious retirement savings.

Before we dive into the key differences, let’s look at two commonalities among all of the retirement accounts:

  • They are types of accounts, not specific kinds of investments.

  • While in the account, your money grows tax-free.

This article will clear up the confusion about several retirement plan options. In the first section, we’ll provide an overview of each retirement account option. You’ll learn that some of these retirement accounts are for employees, some are for employers, and there are accounts that pertain to both employers and employees. The chart will provide a clear comparison of the features of the 401(k)/403(b), Solo 401(k), SIMPLE IRA, and SEP IRA accounts.

401(k): The employer-sponsored retirement plan

A 401(k), which is widely used across the United States, is a retirement savings account created for you by your employer. You transfer money from your paycheck into the retirement account. The investment options within the plan are selected by your employer, and from that predetermined selection, you may choose the funds for your individual 401(k) account. You’ll likely choose from among mutual funds, stocks, bonds, money market funds, savings accounts, and other investment options.

Many companies often offer what’s called a 401(k) match, in which they contribute additional money on top of your own contributions as an employee benefit and incentive for employees to increase their own contributions. Matching contributions can be a partial percentage of the employee’s contribution or a dollar-for-dollar match up to a certain limit—although there are different 401(k) employer match types.

The contributions a participant makes to their 401(k) can  be made on a pre-tax basis or as Roth 401(k) deferrals. In a pre-tax model, participant's contribution are removed from their taxable income and not taxed until withdrawals are made. Thus, if you make $60,000 per year and contribute $15,000 to your retirement account, you’ll only pay federal income tax on $45,000. And once in the account, the funds grow tax-free as well. 

Some 401(k) plans may also allow participants to contribute Roth post-tax deferrals. Rather than paying taxes at the point of withdrawal, Roth contributions are made on an after-tax basis, meaning the contribution is determined after taxes are taken out.

There’s a similar type of retirement plan  called a 403(b), which is often used by schools, nonprofits, and religious organizations. The major difference between the 401(k) and 403(b) accounts is the type of employer. 403(b) investment options may include annuity contracts as well as mutual funds.

Learn more about the general differences between 401(k) vs. 403(b).

Solo 401(k) for a small business without employees

If you’re an entrepreneurial business person without employees, then you may create a 401(k) plan for you and your spouse. The solo 401(k) plan follows the same rules as the employer-sponsored 401(k) including contribution limits.

For more information, refer to our more detailed article about Solo 401(k)s: Solo 401(k) Tips on Finding a Provider, Adding Your Spouse, Fees, and More!

SIMPLE IRA plan for small businesses

The SIMPLE IRA (Savings Incentive Match Plan For Employees IRA) was created to give small employers with fewer than 100 employees with $5,000 or more in compensation a straightforward way to contribute to their employees and their own retirements. Employees can elect to contribute to their IRA set up under the SIMPLE IRA plan and the employer is required to make either matching or non-elective contributions to that IRA retirement account. Similar to the other retirement plan options, all employee contributions are made pre-tax, in other words, the funds are transferred from the worker’s salary to the accounts before income taxes are calculated. Thus, by contributing to these types of retirement plans, not only are eligible employees growing their retirement funds, but they are also reducing their current income taxes.

SEP IRA

Businesses of any size are eligible to set up a SEP IRA (Simplified Employee Pension IRA) for their employees. These plans are designed to be easy to manage, are funded solely with employer contributions, and are similar to traditional IRA accounts. Employers can contribute up to 25% of the employee’s compensation into their SEP IRA account with a $69,000 cap for 2024.

SIMPLE IRA vs 401(k) vs Solo 401(k) vs SEP IRA

So which type of retirement plan makes the most sense for you? The following chart lays out the details of each one.

Who it’s forWho may contribute
401(k)Any type of public or private companyEmployer and employee
403(b)Employees of public schools and tax-exempt organizationsEmployer and employee
Solo 401(k)Solo entrepreneursEmployer or entrepreneur. May also contribute to a spouse’s account.
SIMPLE IRAEmployers with 100 or fewer employees and self-employed individualsEmployer and employee
SEP IRASelf-employed individuals and small business ownersEmployer only

2024 contribution limits

  • 401(k): Employees may contribute up to $23,000 (with an additional $7,500 for those age 50 and over) or 100% of income, whichever is lower. An employer can contribute up to 100% of the employee’s salary with total combined contributions not to exceed $66,000 ($73,500 including catch-up contributions for employees age 50+). 401(k)s have much higher contribution limits than IRAs.

  • Solo 401(k): As the employee, you may contribute up to $23,000 (with an additional $7,500 for those age 50 and over) or 100% of your income, whichever is lower. As the employer, you may contribute up to 25% of your annual compensation as an employer contribution. The maximum total contribution is $69,000 or $76,500 for employees aged 50+.

  • SIMPLE IRA: Employees may contribute up to $16,000 (with an additional $3,500 for those aged 50 and over). The annual required employer contributions may also be contributed.

  • SEP IRA: Employer contributes up to 25% of employee salary up to a maximum of $69,000.

Best practices for retirement savings

When planning your retirement saving and investing approach, consider this rule of thumb first:  If you’re an employee, contribute the amount necessary to receive your employer match when possible. For example, if your employer matches the first 3% of your contribution to your company 401(k), then you should contribute at least that amount to the plan so you can collect the matching contribution. If you don’t, you’re turning down “free money.”

Another important rule of thumb is to start saving as soon as you can. By starting early, and contributing as much as possible, you’re setting yourself up for a secure financial future.

Learn more: How to Invest and How to Make It Easy

Deciding on the right retirement plan

The right type of plan depends on your individual needs and circumstances. Whether you're a high earner or just looking for simplicity and flexibility, there's a plan out there for you. Remember, the goal is to secure your future and enjoy the financial freedom that may come with a well-planned retirement.

If you want to set up or switch to a 401(k) that’s great for employees and employers, let your company know about Human Interest.

Trenton Reed is the Manager of Content Strategy at Human Interest. He has nearly a decade of experience writing for Fortune 500 and SMB companies across finance, technology, and other verticals.

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