If you're a self-employed business owner with employees, there is more riding on your choice of retirement plan. Depending on which plan you choose, you will be responsible for matching or, in some cases, funding the entire retirement contributions of your employees. Let's see how each plan stacks up.
By definition, the Solo 401(k) plan is only for one-person companies or a business run by a husband and wife.
The SEP IRA is potentially the most expensive of the two remaining plans, because an SEP IRA is completely employer-funded. According to the IRS, if you are a self-employed business owner and want to contribute 25 percent of your compensation to a SEP IRA, then you need to contribute 25 percent of each of your employees' salaries to their SEP IRA as well [source: IRS]. The employees don't pay a dime.
The SIMPLE IRA is available for businesses with 100 employees or fewer. As we discussed earlier, there are two options for managing employee contributions. The first is to match employee contributions dollar for dollar up to a maximum limit of 3 percent of the employee's annual salary. In that case, the responsibility falls to the employee to contribute enough to receive the maximum match.
The second SIMPLE option is called a "nonelective" contribution [source: IRS]. Under this formula, the employer must contribute a minimum of 2 percent of the employee's salary to the plan, whether or not the employee contributes anything herself. An employer looking to save money will have to figure out if his or her employees are the type to maximize their contributions or not.
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