Solo 401k vs. SIMPLE IRA: Which Plan Should You Choose?

For self-employed individuals and small business owners, the Solo 401(k) and the SIMPLE IRA are two common retirement plan options. Both provide a tax-advantaged way to save for the future, but their rules for participation, contributions, and features are different. This article compares their key differences to help you determine which plan is more suitable for your business goals.

Eligibility Requirements

A plan’s eligibility rules represent a primary dividing line between the Solo 401(k) and the SIMPLE IRA. The Solo 401(k) is designed exclusively for self-employed individuals or a small business owner with no employees, making it a good choice for freelancers and independent contractors. A critical exception exists for a spouse who earns income from the business, as they can also participate. If the business hires any other full-time employee working more than 1,000 hours a year, it is no longer eligible for a Solo 401(k).

In contrast, the SIMPLE IRA is structured for small businesses that have employees. A business can establish a SIMPLE IRA if it has 100 or fewer employees who received at least $5,000 in compensation during the preceding year. Unlike the Solo 401(k), the SIMPLE IRA requires all eligible employees to be included, making it a broader option for a growing small business.

Contribution Rules and Limits

A Solo 401(k) allows the business owner to contribute as both the “employee” and the “employer.” As the employee, you can contribute 100% of your compensation up to the annual limit of $23,500 in 2025. On top of this, the business can make an employer contribution, structured as a percentage of self-employment earnings, up to 25% for corporations or 20% for sole proprietorships. The combined contributions cannot exceed the overall limit of $70,000 for 2025, and many plans permit Roth contributions.

For those age 50 and over, catch-up contributions can further increase savings. In 2025, the catch-up is $7,500 for participants ages 50-59 and 64+, but a higher catch-up of $11,250 is available for those ages 60-63.

The SIMPLE IRA has lower contribution limits. An employee can contribute up to $16,500 in 2025. Those age 50 and over can make an additional catch-up contribution of $3,500, which increases to $5,250 for participants aged 60 to 63. Employer contributions to a SIMPLE IRA are mandatory. The business must choose one of two options: a dollar-for-dollar match of employee contributions up to 3% of their compensation, or a non-elective contribution of 2% of compensation for every eligible employee.

For instance, if an employee earning $60,000 contributes at least $1,800 (3%), the employer must also contribute $1,800 under the matching formula. With the non-elective formula, the employer would contribute $1,200 (2% of $60,000) for that employee, even if the employee contributes nothing.

Key Plan Features and Flexibility

One of the key features of a Solo 401(k) is the ability to take a participant loan. Plan documents can permit the owner to borrow from their retirement savings without triggering taxes or penalties. You can borrow the lesser of 50% of your vested account balance or $50,000. These loans must be repaid with interest over a maximum of five years, though an exception allows for a longer repayment period if the loan is used to purchase a primary residence. In contrast, loans are prohibited from SIMPLE IRAs.

Rollover rules also highlight differences in flexibility. A Solo 401(k) allows you to consolidate funds from former employer 401(k)s or Traditional IRAs into the plan. SIMPLE IRAs have a two-year waiting period that begins on the date the first contribution is made. During this two-year window, funds can only be moved to another SIMPLE IRA. Attempting to roll funds to a non-SIMPLE plan within this period is treated as a taxable distribution and could be subject to a 25% penalty if you are under age 59½.

Administrative and Employee Considerations

SIMPLE IRAs are recognized for their administrative ease. Setup is often accomplished by completing IRS model forms, such as Form 5304-SIMPLE or 5305-SIMPLE, and there are no annual IRS filing requirements for the employer. A Solo 401(k), on the other hand, requires a formal plan document to be adopted by the end of the tax year. Additionally, a Solo 401(k) with total assets of $250,000 or more at the end of the year must file an annual information return, Form 5500-EZ, with the IRS by July 31 of the following year.

The most significant operational difference emerges when a business hires employees. A Solo 401(k) must be terminated or converted into a standard 401(k) plan once the business hires a non-spouse employee who works more than 1,000 hours in a year. A SIMPLE IRA is designed to accommodate employees from the start and can continue to operate as the business grows, as long as the company stays below the 100-employee threshold.