How to Choose Between a Solo 401(k) or a SIMPLE IRA
If you are a self-employed person, several plans are available to save for your retirement. Two of the newer plans are the Solo 401(k) and the SIMPLE IRA. Both plans are excellent, but several differences should be examined before you choose either.
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Instructions
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Know that a SIMPLE IRA is not a regular IRA but a plan that is designed for small business owners to offer to their employees.
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Choose the plan that allows the most income to be put away. In 2007 the SIMPLE IRA allowed you to put away $10,500 plus an additional catch up amount if you are over 50 years old. You also are allowed up to a 3 percent match to the plan. The same year Solo 401(k) allowed up to $15,500 in contributions plus a catch up. The Solo 401(k) also has a profit sharing feature that allows you to contribute up to 25 percent of your income, on top of your regular contributions. The maximum deferral in 2007 was $45,000.
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Compare the percentage. The Simple IRA allows you to contribute up to 100 percent of your income (within the deferral limits) into your plan. The Solo 401(k) allows you to contribute 100 percent of the income on the first $15,000, plus 25 percent of your total.
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Check the fees. The SIMPLE IRA tends to have smaller fees since the plan is, as it states, simple. The only filing that is done is in your file cabinet. The reporting is simplified on the Solo 401(k), but there are usually higher fees than in the SIMPLE IRA.
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See if there is a need to borrow the money. If you choose a Solo 401(k) over the Simple IRA, you have the right to borrow the funds. There are, of course fees that will be involved in the transaction, but no taxation. If you have a Simple IRA, any money removed before you reach age 59 ½ is subject to a 10 percent penalty and taxation.
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Question future expansion. If you think that you will be adding staff, other than a spouse, then you should consider choosing the Simple IRA over the Solo 401(k). The Simple IRA allows for growth of your company. The Solo 401(k) is exactly as its name suggests -- just for one person.
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Begin early. Both plans need to have the employee deferral put in before the end of the year. Both have a specific date that they have to be started in order to count for that year's deferral. Be aware of the time lines for the two plans.
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