ADH Financial Services LLC

Simple IRA vs. Solo 401(k) vs. SEP IRA: Pros and Cons

When choosing a retirement plan for your small business or self-employment income, it’s essential to understand the differences between a SIMPLE IRA, Solo 401(k), and SEP IRA. Here’s a breakdown of the pros and cons of each to help you make an informed decision:

1. SIMPLE IRA (Savings Incentive Match Plan for Employees IRA)

✅ Pros:
1. Ease of Setup: Simple to establish and maintain with minimal paperwork.
2. Employer Contributions: Mandatory employer contributions (either matching up to 3% or a 2% non-elective contribution).
3. Cost-Effective: Lower administrative costs compared to 401(k) plans.
4. Employee Participation: Allows employees to contribute.

❌ Cons:
1. Lower Contribution Limits: Maximum employee deferral of $15,500 for 2025 (+$3,500 catch-up for 50+).
2. Mandatory Employer Contributions: Not optional, which can be a financial strain.
3. Limited Investment Options: Often limited by the provider’s choices.
4. No Roth Option: Contributions are pre-tax only.

2. Solo 401(k) (Individual 401(k))

✅ Pros:
1. High Contribution Limits: Combines employee deferrals ($23,000 for 2025, +$7,500 catch-up for 50+) and employer contributions (up to 25% of compensation) with a total limit of $66,000 (or $73,500 with catch-up).
2. Roth Option Available: Can offer a Roth component for tax-free growth and withdrawals.
3. Loans Allowed: Borrow up to 50% of the balance, up to $50,000.
4. No Mandatory Contributions: Flexibility for employer contributions.

❌ Cons:
1. Limited to Owner and Spouse: Cannot cover other employees.
2. Administrative Requirements: More paperwork and annual IRS Form 5500 required if assets exceed $250,000.
3. Complex Setup: More complex and potentially costly to establish.

3. SEP IRA (Simplified Employee Pension IRA)

✅ Pros:
1. High Contribution Limits: Up to 25% of compensation or $66,000 for 2025, whichever is less.
2. Simplicity: Easy to set up and administer.
3. Flexibility: Employer contributions are discretionary each year.
4. Ideal for Solopreneurs: Beneficial for businesses with no employees or only the owner.

❌ Cons:
1. Employer-Funded Only: Employees cannot contribute—only the employer.
2. No Roth Option: Contributions are pre-tax only.
3. Equal Percentage Contributions: Must contribute the same percentage for all eligible employees.
4. No Loan Provision: Cannot borrow from a SEP IRA.

Summary: Which One is Right for You?
• Choose a SIMPLE IRA if you want a straightforward plan for a small business with employees and don’t mind mandatory contributions.
• Go with a Solo 401(k) if you’re self-employed or own a business without employees and want high contribution limits and Roth options.
• Pick a SEP IRA if you want high contribution limits, simple administration, and are okay with employer-only contributions.

Need help deciding? Let’s talk through your options based on your income, business structure, and retirement goals!

Book an appointment at ADH Financial Services LLC