Solo 401(k) vs SIMPLE IRA: When Each Plan Makes Sense

Why this matters

SIMPLE IRA is usually marketed as the "easy" small-business plan, but for a true one-person business it is almost always wrong. Here's why.

Contribution caps

SIMPLE IRA 2026 cap: $16,500 employee deferral + $3,500 catch-up at 50. Solo 401(k) cap: $23,500 + $7,500 catch-up plus the employer profit-sharing share up to a $70,000 combined ceiling. SIMPLE caps out around $20k-25k. Solo 401(k) goes to $70k+.

Employer required match

SIMPLE IRA forces the employer to either match dollar-for-dollar up to 3% of comp, or contribute 2% of comp to every eligible employee whether they participate or not. For a true solo business this is a wash since you are both. But it forces the math; you cannot opt out.

Setup speed

SIMPLE IRA: about 10 minutes at any broker, no Form 5500. Solo 401(k): 30 minutes, Form 5500-EZ above $250,000 in assets. Both are easy by retirement-plan standards.

When SIMPLE IRA actually wins

You have employees and your priority is paying them a small but guaranteed retirement contribution without the complexity of nondiscrimination testing that comes with a regular 401(k). For owner-only operations, SIMPLE IRA almost never wins because the contribution ceiling is so much lower.

The numbers

$120k SE income, age 38: SIMPLE IRA contribution = $16,500 employee + about $3,600 employer match = $20,100. Solo 401(k) = $23,500 + $22,164 = $45,664. The Solo 401(k) is $25,500 ahead. Compounded at 7% for 25 years, that gap is $138,000.