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

10 MIN READEditorial Policy

Key Takeaways

  • As an employer, you have the option of offering several types of retirement benefits, including 401(k) plans

  • When deciding, it’s important to factor in costs and the number of employees you employ

  • If you don’t have any employees, the most significant difference between the solo 401(k), SEP IRA, and SIMPLE IRA is the contribution limit

Saving for retirement has largely transitioned from the defined benefit pension plan, where employers provided employees with a pension plan, to more of an individualized structure. These days, retirement is often defined by the individual socking away enough funds to secure a stable financial future. Individuals have numerous financial vehicles to help them save for the future—some of which may be provided by you, the employer.

This article is designed to help employers compare different types of popular retirement plans. You’ll learn that some of these retirement accounts are for employees, some are for employers, and some are for both. We’ll also provide a chart that compares some of the features of 401(k), 403(b), Solo 401(k), SIMPLE IRA, and SEP IRA plans.

401(k): The employer-sponsored retirement plan

A 401(k), which is widely used across the United States, is a tax-advantaged retirement savings account provided by employers. Employees transfer money from their paychecks into their retirement accounts and often choose from a select lineup of investment options. Generally, employees can choose from among mutual funds, stocks, bonds, money market funds, savings accounts, and other investment options.

Many employers offer a 401(k) match, in which they contribute additional money on top of an individual’s own contributions as an employee benefit and incentive for employees to increase their own contributions. There are different 401(k) employer match types, and contributions can be a percentage of the employee’s contribution or a dollar-for-dollar match up to a certain limit.

Contributions to a 401(k) can be made on a pre-tax basis or as Roth 401(k) deferrals. In a pre-tax model, participants' contributions are removed from their taxable income and not taxed until withdrawals are made. For example, if an employee makes $60,000 annually and contributes $10,000 to their retirement account, they’ll only pay federal income tax on $50,000. 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.

Similarities between 403(b) vs. 401(k)

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 small businesses without employees

If you’re an entrepreneur 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. A solo 401(k) is ideal for sole proprietors or independent contractors. It operates similarly to a traditional 401(k) plan. However, the business owner can contribute as both the employer and the employee. 

SIMPLE IRA: Plans 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 an easier 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, or the funds are transferred from the worker’s salary to the accounts before income taxes are calculated. By contributing to these types of retirement plans, eligible employees grow their retirement funds and can reduce their current income taxes.

SEP IRA: For self-employed individuals or SMBs with few employees 

Businesses of any size are eligible to set up a SEP IRA (Simplified Employee Pension IRA). These plans are designed to be easy to manage, funded solely with employer contributions, and 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. The SEP IRA also has withdrawal rules, which dictate that if employees make an early withdrawal from your plan and do not meet the IRS eligibility requirements, they’ll have to pay a fine. 

The drawback of the SEP IRA is that all eligible employees must receive equal contributions. This does not make it ideal if you want to make larger contributions for yourself, as the employer, and it could be costly as your business scales. 

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

So, which type of retirement plan makes the most sense for your company? The following chart provides a high-level summary.

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

When deciding which retirement plan to adopt, it’s important to consider a few factors including costs and whether you have employees. If you do not have any employees, the most significant difference between the solo 401(k), SEP IRA, and SIMPLE IRA is the contribution limit. For example, solo 401(k) plans carry higher contribution limits, as you can contribute both as an employer and employee if you’re self-employed. However, a solo 401(k), may cost more than a SEP IRA or SIMPLE IRA and may require additional administrative work.

Did you know? At Human Interest, we offer 401(k) plans for solopreneurs and businesses with employees that help you manage compliance and administrative burdens so that you can focus on running your business instead of managing your retirement plan paperwork.

2024 contribution limits

  • 401(k): 401(k) plans have much higher contribution limits than IRAs. 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+).

  • Solo 401(k): Employees may contribute up to $23,000 (with an additional $7,500 for those age 50 and over) or 100% of their income, whichever is lower. Employers may contribute up to 25% of their 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.

Deciding on the right retirement plan

The right type of retirement savings plan depends on your company's needs and financial situation. Whether you're a fast-growing company or a solo operation, there's a plan out there for your business.

Contact Human Interest today if you want to learn more about 401(k) plans that can scale as your company grows.

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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