Solo 401(k) vs. SIMPLE IRA Comparison

Solo 401(k) vs SIMPLE IRA: Retirement Plan Comparison

A SIMPLE IRA plan is very much similar to a Solo 401(k) Plan in that it is funded by employee deferrals and additional employer contributions. However, the SIMPLE IRA plan uses an IRA-type trust to hold contributions for each employee, rather than a single plan trust that is typical of a traditional employer 401(k) Plan and which Solo 401(k) provides.

A SIMPLE IRA can be opened with a bank, insurance company or other qualified financial institution and the employee owns and controls the it.

Advantages Solo 401(k) over SIMPLE IRA:

  • Reduced Catch-Up Contribution amount: With a Solo 401(k) Plan, for 2018, a plan participant who is over the age of 50 is able to make a catch-up contribution of up to $6,000.
  • Solo 401(k) allows for an Roth option, whereas SIMPLE IRA has much more stringent conditions.
  • Higher Contributions: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SIMPLE IRA only offers minimal employee deferral opportunities.
  • No Roth Feature: A Solo 401(k) Plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a SIMPLE IRA, contributions can only be made in pre-tax format.
  • Tax-Free Loan Option: With a Solo 401(k) Plan you can borrow up to $50,000 or 50% of your account value, whichever is less.
  • Use non recourse Leverage and Pay No Tax: With a Solo 401(k) Plan, you can make a real estate investment using nonrecourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax (IRC 514).
  • Open the Account at Any Local Bank: With a Solo 401(k) Plan, the 401k bank account can be opened at any local bank or trust company.
  • No Need for the Cost of an LLC: With a Solo 401(k) Plan, the plan itself can make real estate and other investments without the need for an LLC, which depending on the state of formation could prove costly.
  • Better Creditor Protection: In general, a Solo 401(k) Plan offers greater creditor protection than a SIMPLE IRA.

So all in all, the Solo 401(k) has many advantages over the SIMPLE IRA. The Solo 401(k) Plan is unique and so popular because it is designed explicitly for small, owner-only businesses.

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