Sole Proprietor Plan Types: Owner only 401k or Solo 401k vs. SEP and SIMPLE

A sole proprietorship is the simplest business type–and unincorporated business entity owned by one person. While sole proprietorships can have employees, the majority of entities are owner-only business. The simplicity of a sole proprietorship’s business structure calls for a retirement plan that is specific to sole proprietor or has its best interest. Sole proprietors generally require a retirement plan that is cost-effective for a small business, easy to administer, and beneficial from an income tax perspective.

Sole proprietors typically open one of the following types of retirement plans. Each plan type offers a different approach to retirement plans saving.

Simplified Employer Pension (SEP IRA)

SEP IRA plans allow sole proprietors to shield a substantial portion of employer income from taxes each year (25% of compensation). The contributions are also discretionary, which means you don’thave to make a contribution every year. One of the main differences between a SEP plan and a profit sharing plans is that SEP contributions are made to the sole proprietor’s Traditional IRA rather than to a plan account.

Saving Incentive Match Plan for Employers (SIMPLE IRA)

SIMPLE IRA plans are also effective and simple to administer retirement options for sole proprietors. SIMPLE IRA plans allow the sole proprietor reduce his or her taxable business income by allowing for the deferral of income on top of a required match contribution.

Solo 401k or Individual 401k or Individual K or Solo K

A sole proprietor with no employees (other than his spouse) also has the option of establishing an owner only 401k plan also known as a Solo 401k. While owner-only 401k or Solo 401k plans have been available since the inception of the 401k plan, there had been no persuasive tax reason for an owner-only business to establish such a plan. Reason being, other plan types offered the same or larger tax benefit or savings limits, without the added complications. This all changed, however, with passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which changed the way deferrals are included in determining the employer’s deductible contribution. This change resulted in higher contribution amounts in a cost-effective, less complex plan. Also known as Solo k orIndividual 401k or Single K, Solo 401k plans have gained popularity since EGTRRA provisions became effective in 2002.


About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


  • Popular Video

  • ROBS 401k Funding Process

  • Solo 401k Contributions Including Mega

  • Checkbook IRA LLC

  • About MySolo401k

    We help our clients take control of their retirement money. Our products and services provide our clients the freedom to invest their retirement savings in their own business as well as alternative investments such as real estate, private companies, promissory notes, precious metals, tax liens and equities.
    Learn more

    Connect with us

  • We’re here to help.

    Call: 800-489-7571


    8:00 am - 4:00 pm PT

    Why us?