A single-participant 401 (k) plan is sometimes referred to as an “individual 401 (k)”, individual 401 (k), or “uni-401 (k)”. It's usually the same as other 401 (k) plans, but because there are no employees other than your spouse who work for the company, you're exempt from testing for discrimination. Rather, it allows the self-employed and small businesses and their employees to benefit from simple, tax-advantaged retirement savings accounts, similar to personal individual retirement accounts (IRAs). But even in some cases where hiring employees simply isn't in play, Henry sometimes advises freelancers to choose an SEP IRA.
The SIMPLE IRA is an easy way for small employers, including self-employed workers, to offer employees a retirement plan. You'll enjoy all the benefits of an IRA, including tax-deferred growth, and you'll be able to take advantage of what many experts consider to be the best functioning retirement account: the Roth IRA. Funds entered into the SEP IRA are fully tax-deductible up to the IRS limits, allowing the company or self-employed person to reduce taxable income on a dollar for dollar basis. The SIMPLE IRA uses the rules of a traditional IRA, so it is tax-deferred and has the same retirement requirements when you retire.
You can benefit from SEP IRA tax exemptions for a given tax year if you open your account before the annual tax-filing deadline, which is usually mid-April. For anyone who wants to open a SIMPLE IRA account, the same rules apply; however, you must also have 100 employees or fewer and cannot maintain any other employer-sponsored retirement plan. An SEP IRA allows a company to make employer contributions to employees, including the self-employed. By contrast, the SEP IRA allows you to contribute at a rate of 25 percent, so you'd have to earn much more to reach the same level of contribution.
SEP IRAs are fully funded by the employer, who has the flexibility to determine when to make contributions and how much to contribute, since there are no requirements in this regard. While SEP IRAs usually have a wider range of options than 401 (k) accounts, the options are more limited than those available in a standard brokerage account. Two of these options are the simplified employee pension (SEP) and individual retirement accounts (IRAs) for employee savings incentives (SIMPLE). For self-employed individuals, an individual 401 (k) account may offer higher annual contribution limits and greater tax deductions than an SEP IRA, depending on their income.
The general view on the issue of the individual 401 (k) IRA versus the SEP is that self-employed people should choose the 401 (k) alone because, in most cases, the potential tax savings are greater.