Retirement accounts such as the solo 401k plan, SEP IRA and SIMPLE IRA are popular choices for the self-employed because they are inexpensive to establish, maintain and minimum IRS reporting applies.
While businesses structured as sole proprietorships, partnerships and corporations can qualify to open all three types of retirement accounts (i.e., solo 401k, SEP and SIMPLE), a solo 401k plan cannot be opened by state and local governments or any political subdivisions, tax-exempt organizations or business with full-time employees.
Te following charts compare all three self-employed retirement plan types more closely.
While all three plans can be utilized by the self-employed, the solo 401k plan is more restrictive from an eligibility perspective because it can only be established by owner-only businesses. See the following chart for more on the eligibility requirements for each type of plan.
Plan Opening and Contribution Deadline
The establishment deadline for each plan type is different and contribution types and deadlines also vary. See the following chart for more.
Unlike the SEP IRA and SIMPLE IRA where distributions can be made at anytime, distribution triggering events apply to solo 401k plans. Also, the mandatory 20% federal tax withholding rule applies to solo 401k plans but not to SEP IRAs and SIMPLE IRAs. See the following chart for more.
As with other IRAs, SEP or SIMPLE IRAs cannot allow participant loans. A loan would be considered a prohibited transaction. On the other hand, because a solo 401k is a 401k plan but for the self-employed with no full-time W-2 employees, participant loans are permitted.
RMDs: SECURE Act Effect on Self-Employed Plans ( Solo 401k, SEP & SIMPLE)
- Required Minimum Distributions (RMDs): For account holders who reach age 72 in 2020 or a later year, they must start taking RMDs by April 1 of the year following the year in which they turned 72.
- The prior RMD rules required distribution to commence once the individual turned age 70 1/2 but this was changed with the passage of the SECURE ACT.
- SEP and SIMPLE IRAs can be aggregated with other IRAs for calculating RMDs, and the total RMD may be taken from just one IRA or a combination of all the IRAs. On the other hand, RMDs from solo 401k plans must be taken from the solo 401k plan not from other IRAs or other 401k plans including full-time employer 401k plans.