What is the difference between Solo 401(k), SIMPLE & SEP for SMB Founders with no employees?

September 30th, 2015

I have found a great deal of "sales promotion" and "Tax Law" information available online but would like to get some real world input on how the subject of retirement is being handled by the self employed. With the understanding that every situation is different there are typically common denominators and preferences in plans. Does anyone care to share their experience in the subject?

Benjamin Olding Co-founder, Board Member at Jana

October 2nd, 2015

It only really matters if your 0-employee company is profitable.

If it is, then presumably it's a pass through for you, showing up on a 1099 or a K-1 maybe... In any event, the income is appearing on your Schedule C.

An individual 401k will let you take not only the standard deduction, but also a matching funds deduction since you are the equivalent of both employee & company. Net, you can contribute up to I think something like $50k (but you have to be pretty profitable - I'm going off memory here - like over $200k profitable); that's a lot of tax savings - potentially a great deal if you foresee less income in the future where you'll be contributing less to your retirement than you can now; these plans were created with the idea you'd usually contribute the same amount each year, something not too realistic for many who are self-employed.

If you're not profitable or not strongly profitable, then I think all the plans you listed are basically the same from a tax standpoint - you can tax-free contribute up to something around $18k.

Unless you really need the tax deduction for some other source of income, you might be better advised to put your retirement savings towards a Roth plan - it's theoretically at least a better deal for retirement. Really, it just depends on your goals here.

Most people in startups aren't operating on huge incomes, so saving for retirement is usually a question of discipline than tax efficiency.