Retirement Plan Comparison: 401(k) vs. SIMPLE IRA vs. Solo 401(k) vs. SEP IRA

LAST REVIEWED Dec 31 2020 10 MIN READ

By The Human Interest Team

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 in the quest for a secure retirement by comparing different types of popular retirement plans. Today, unlike during the last century, retirement rests firmly upon 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 plan or plans will be the best home for your precious retirement savings dollars.

Before we get into the meat of the article, let’s look at two commonalities among all of the retirement accounts:

  • We are discussing types of accounts, not specific kinds of investments.

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

Further, it’s useful to understand that you might place your money in the same mutual fund, whether it’s in a 401(k), SIMPLE IRA, or a SEP IRA.

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.

The Employer Plan: 401(k)

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 stock, bond, and combination stock and bond mutual funds. 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.

The beauty of the 401(k) account is that the money transferred into the account is removed from your taxable income and isn’t taxed until withdrawn in retirement. 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.

There’s a similar type of retirement account 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. A 401(k) can be offered by any public or private firm and is much more common. A 403(b), also known as a tax-sheltered annuity (TSA) plan, is a retirement account for certain tax-exempt organizations. The 403(b) investment options may include annuity contracts as well as mutual funds.

A more detailed article about 403(b)s specifically: 403(b) Compared to 401(k): Retirement Plans for Non-Profits

The 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.

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

Simple IRA for Small Businesses

The Simple IRA was created to give small employers with fewer than 100 employees and $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 Simple IRA and the employer is required to make either matching or non-elective contributions to the 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 employees growing their retirement monies, they are also reducing their current income taxes.

SEP IRA

Any size business is eligible to set up a SEP IRA for their employees. This easy-to-administer plan is funded solely with employer contributions and is similar to a traditional IRA account. Further, employers can contribute up to 25% of the employee’s contribution into their SEP IRA account with a $57,000 cap for 2020.

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 of the retirement plans.

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

2020 contribution limits

Employees may contribute up to $19,500 with $6,500 additional for those over age 50. Employer can contribute up to 100% of salary with total combined contributions not to exceed $57,000 ($63,500 including catch-up contributions for employees age 50+).

Employees may contribute up to $19,500 with $6,500 additional for those over age 50. Employer can contribute up to 100% of salary with total combined contributions not to exceed $57,000 ($63,500 including catch-up contributions for employees age 50+).

As an employee, may contribute up to $19,500 or 100% of income, whichever is lower. The employer may contribute up to 25% of compensation. Maximum total contribution is $57,000 or $63,500 for employees age 50+.

$13,500 employee maximum with $3,000 additional for those age 50+. Employers match employee contributions up to 3% or at least 1% in 2 out prior 5 years. Or employer may contribute 2% of employee’s salary (regardless of employee contribution.)

Employer contributes up to 25% of employee salary up to a maximum of $57,000.

Retirement rule of thumb

When planning your retirement saving and investing approach, consider this rule of thumb first – if you’re an employee, always contribute the amount necessary to receive the employer match. For example, if your employer matches the first 3% of your contribution to your company 401(k), then you must contribute at least that amount to the plan as well. If you don’t, you’re actually turning down “free money.”

Read about: 401(k) vs. Traditional IRA vs. Roth IRA

After that point, you need to consider all of your retirement plan options. Even if you’re an employee, you may be able to contribute to another type of retirement plan as well. By starting early, and contributing as much as possible, you’re setting yourself up for a secure financial future.

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.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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