Updated for 2026 IRS limits

Solo 401(k) vs SIMPLE IRA: Which Small Business Plan Is Better?

Both plans are designed for small businesses — but they serve fundamentally different situations. The Solo 401(k) is built for the owner-only business that wants maximum savings; the SIMPLE IRA is designed for small teams where employees need to participate.

Solo 401(k)
Individual 401(k) — owner + spouse only
2026 total limit$72,000
Employee deferral$24,500
Age 50+ catch-up+$8,000
Employees allowedOwner + spouse only
Loan provisionYes ✓
Roth optionYes ✓
VS
SIMPLE IRA
For employers with ≤100 employees
2026 employee deferral$17,000
Small employer (≤25) limit$18,100
Age 50+ catch-up+$4,000
Employees allowedUp to 100 ✓
Early withdrawal yr 1–225% penalty!
Mandatory employer contribYes — 3% or 2%
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Full Feature Comparison

The deciding factor is almost always whether you have non-spouse employees.

Feature Solo 401(k) SIMPLE IRA
Maximum Annual Contribution
$72,000
Employee + employer combined
$17,000 employee
+ required employer match
Employee Elective Deferral
Up to $24,500 Up to $17,000
$18,100 if ≤25 employees
Employer Contribution
Up to 25% of W-2 / 20% of net SE income
Discretionary — 0% is allowed
3% match OR 2% non-elective
Mandatory — cannot skip
Age 50+ Catch-Up
+$8,000 +$4,000
+$5,000 if ≤25 employees
SECURE 2.0 Super Catch-Up (60–63)
+$11,250 +$5,250
Non-Spouse Employees Allowed
No — disqualified if hired Yes ✓ — up to 100
Spouse Participation
✓ Yes — if employed in business ✓ Yes — treated as an employee
Roth Option
✓ Yes (if plan allows) ✓ Yes (SECURE 2.0)
Loan Provision
✓ Yes — up to 50% / $50k No
Early Withdrawal Penalty
10% + taxes 25% in first 2 years!
10% after 2 years
IRS Annual Filing
Form 5500-EZ if assets > $250k None ✓
Contribution Deadline
Employee deferral: Dec 31
Employer: tax filing deadline
Employee: per payroll
Employer: 30 days after period end
Setup Requirements
Plan document required IRS Form 5304-SIMPLE or 5305-SIMPLE
RMD Start Age
Age 73 Age 73

How Much Can You Contribute at $80k Net SE Income?

Assuming $80,000 net self-employment income (after the half of SE tax deduction).

💼 Solo 401(k) at $80k

Employee deferral (up to limit)$24,500
Employer profit-sharing (~20%)$16,000
Total 2026 contribution$40,500

🏦 SIMPLE IRA at $80k

Employee deferral (up to limit)$17,000
Employer match (3% of $80k)$2,400
Total 2026 contribution$19,400

At $80k income, the Solo 401(k) allows more than 2× the total contributions vs SIMPLE IRA. The gap is widest at moderate income levels where the employee deferral alone exceeds the SIMPLE IRA cap.

Pros & Cons

💼 Solo 401(k)
Pros
  • Much higher contribution ceiling — up to $72,000 per year
  • Employer contribution is fully discretionary — contribute nothing in a bad year
  • Roth option (after-tax, tax-free growth)
  • Loan provision — borrow up to 50% of balance or $50k
  • Standard age-50 catch-up ($8,000) plus SECURE 2.0 super catch-up (60–63)
  • Spouse can participate if employed in the business
Cons
  • Automatically disqualified once you hire a non-spouse full-time employee
  • Employee deferral election must be made by December 31 (not extendable)
  • Form 5500-EZ required annually when assets exceed $250k
  • Fewer brokerages offer Solo 401(k) compared to IRAs
🏦 SIMPLE IRA
Pros
  • Works for businesses with up to 100 employees — employees can save too
  • Extremely easy to set up (IRS Form 5304 or 5305 — no custom plan document)
  • No annual IRS filing requirements
  • Employees appreciate the salary deferral option as a workplace benefit
  • SECURE 2.0 Roth SIMPLE IRA option now available
Cons
  • Much lower deferral cap ($17,000 vs $24,500 for Solo 401k employee portion)
  • Mandatory employer contributions — cannot skip even in a bad year
  • 25% penalty on early withdrawals in the first 2 years — very harsh
  • Cannot roll over to an IRA (non-SIMPLE) until 2-year participation requirement met
  • Only 100-employee limit — not scalable beyond that

Which Should You Choose?

Choose Solo 401(k) if…
  • You're self-employed with no non-spouse full-time employees
  • You want to maximize your annual contributions (up to $72,000)
  • You want Roth contributions or a loan option
  • You want flexibility to contribute $0 in lean years
  • Your spouse works in the business and you want to double contributions
  • You're age 50+ and want the larger catch-up ($8,000 vs $4,000)
Choose SIMPLE IRA if…
  • You have employees (other than your spouse) who need retirement coverage
  • You want simplicity with no plan document or 5500 filing
  • You're a small business wanting to offer employees a salary-deferral benefit
  • You're comfortable with mandatory employer contributions
  • You're planning to grow to more than just yourself and a spouse
💡 Growth transition tip: Start with a Solo 401(k) while you're a sole proprietor. When you hire your first non-spouse full-time employee, you must transition to a SEP IRA, SIMPLE IRA, or full 401(k). Plan this transition in advance — a SIMPLE IRA cannot be terminated mid-year, and participants face the 2-year restriction on rollovers.

Common Questions

What happens to my Solo 401(k) if I hire an employee?

The Solo 401(k) is only available to businesses with no full-time employees other than the owner and their spouse. If you hire a non-spouse employee who works 1,000+ hours per year, you must transition the plan to a regular 401(k), SEP IRA, or SIMPLE IRA. You typically cannot simply exclude the new employee. Consult a plan administrator before hiring.

Why does the SIMPLE IRA have a 25% early withdrawal penalty?

The 25% penalty applies only within the first 2 years of a participant's initial enrollment in the SIMPLE IRA. Congress designed this to discourage employees from immediately withdrawing funds after employers make required contributions. After 2 full years, the standard 10% early withdrawal penalty applies (like a Traditional IRA or 401k).

Can I have a Solo 401(k) and a SIMPLE IRA at the same time?

Generally no — not for the same business. You cannot maintain a SIMPLE IRA and a 401(k) plan simultaneously for the same employer. If you have income from a separate business (e.g., a W-2 job plus self-employment income), you might have a SIMPLE IRA through your employer and a Solo 401(k) for your side business, subject to the combined employee deferral limit of $24,500 across all plans.

Can I contribute to a Solo 401(k) and a Roth IRA in the same year?

Yes. Solo 401(k) contributions don't affect IRA contribution limits. You can max your Solo 401(k) at $72,000 and also contribute up to $7,500 to a Roth IRA (subject to income limits) in 2026. This combination can dramatically accelerate tax-free wealth building for self-employed individuals.