Individual 401(k)
SEP IRA
Business profile
With an individual (or solo) 401(k), self-employed business owners and their spouses can deduct contributions from the business, as well as reduce personal taxes by contributing as an employee
Self-employed, sole proprietorships, partnerships, non-profits and corporate employers who want tax-deferred growth potential plus flexibility on making annual contributions with access to a full range of investment choices
Business tax benefits
- Employer contributions and plan expenses are tax deductible
Employer contributions are tax deductible
Who can contribute
Employer
Your choice whether or not to contribute, and when
Employee (this includes you as the business owner)
- Maximum employee salary deferral is $18,0002
- Employees age 50 or older are eligible to make an additional $6,000 catch-up contribution
Employer
Contributions by the business only; your choice whether or not to contribute, when and how much
Contribution limits
Total allocations per employee (employee contributions and employer contributions) are limited to the lesser of $53,000 ($59,000 for age 50 or older) or 100% of compensation with a $265,000 compensation cap per employee2
- Includes employer limit of 25% of eligible compensation (20% for self-employed)
- Maximum employee salary deferral is $18,0002
- Employees age 50 or older are eligible to make an additional $6,000 catch-up contribution
Employer contributions limited to the lesser of $53,000 or 25% of eligible compensation or 20% of net earnings from self-employment2
Roth 401(k) or after-tax contributions
Vesting
Vests immediately
Vests immediately
Loans
Withdrawal rules
Hardship and non-hardship withdrawals may be available (if certain conditions are not met, a 10% additional federal tax may apply)
Before age 59½, taxable withdrawals—with certain exceptions—are subject to a 10% additional federal tax
Administrative requirements
IRS filing required when plan assets are greater than $250,000
Not applicable
Plan establishment deadline
Last day of employer's taxable year in which a contribution is made (for example, if contributing in a given calendar year, must be established in same calendar year with time allowed to make contributions)
Tax filing deadline of the business, including extensions for tax year deductions for the prior year
- April 15 for individuals, sole proprietors and partnerships (or 9/15 if extension filed)
- March 15 for corporations and subchapter S (or 9/15 if filed an extension)
Invest with advice when you need it
Invest with a licensed Merrill Financial Advisor, who can help you pursue your financial goals and plan for what matters most to you.
1 Can be reduced to as low as 1% in two out of any five years; compensation cap does not apply.
2 Contribution limits and benefits apply for 2016. Amounts for subsequent years may vary.
401(k)
SEP IRA
SIMPLE IRA
Business profile
Business owners who want the benefits of business tax breaks while offering a simplified, affordable
401(k) plan that may help to attract and retain employees
Self-employed, sole proprietorships, partnerships, non-profits and corporate employers who want tax-deferred growth potential plus flexibility on making annual contributions with access to a full range of investment choices
Business owners with fewer than 100 employees who want to enjoy tax-deferred growth and deductions on contributions to individual accounts
Business tax benefits
- Employer contributions and plan expenses are tax deductible
- May qualify for up to $500 tax credit for three years if this is your first plan (covers setup and administrative expenses)
Employer contributions are tax deductible
Employer contributions are tax deductible
Who can contribute
Employer & employees
Employer chooses:
- Employer match
- Profit sharing
- If you choose to make a profit-sharing contribution to your account, a contribution must be made to all eligible employees' accounts
- Not to contribute
- Safe Harbor plans: employer contribution required.
Employer only
If you choose to make a contribution to your account, you must contribute the same percentage to all eligible employees' accounts
Employer & employees
Employer must contribute but may adjust annually
Contribution limits
Total contributions per employee (employee contributions and employer contributions) are limited to the lesser of $53,000 ($59,000 for age 50 or older) or 100% of compensation with a $265,000 compensation cap per employee2
- Includes employer limit of 25% of eligible compensation (20% for self-employed)
Employee
- Maximum employee salary deferral is $18,0002
- Employees age 50 or older are eligible to make an additional $6,000 catch-up contribution
Employer contributions limited to the lesser of $53,000 or 25% of eligible compensation or 20% of net earnings from self-employment2
Employers must contribute but may adjust annually4 either:
- Dollar-for-dollar match of employee salary deferral up to 3% of compensation1
OR
- Flat 2% of compensation to all eligible employees
Employee
- Maximum employee salary deferral is $12,5002 plus employer contributions
- Employees age 50 or older are eligible to make a $3,000 catch-up contribution
Employee eligibility
Age-based exclusions cannot exceed 21 years of age; service-based exclusions cannot exceed one year of service or two years for fully vested employer contributions
Generally, employees at least 21 years of age who earned more than $600 for the year of the contribution and worked three of the past five years
Generally, employees who earned at least $5,000 in compensation in any two prior years and are reasonably expected to earn at least $5,000 in the current year3
Roth 401(k) or after-tax contributions
Yes
Not applicable
Not applicable
Vesting
- Employer contributions may vest over time according to plan terms (employer contributions to a safe harbor plan vest immediately)
- Employee contributions vest immediately
Vests immediately
Vests immediately
Loans
Yes
Not applicable
Not applicable
Withdrawal rules
Hardship and non-hardship withdrawals may be available (if certain conditions are not met, a 10% additional federal tax may apply); not available for employer Safe Harbor contributions
Before age 59½, taxable withdrawals—with certain exceptions—are subject to a 10% additional federal tax
- Before age 59½, taxable withdrawals—with certain exceptions—are subject to a 10% additional federal tax
- Early withdrawal tax increases to 25% for withdrawals taken within two years of the first contribution
Administrative requirements
- IRS filing required
- Safe Harbor plan automatically satisfies certain plan testing
- Non-Safe Harbor plan subject to testing
- IRS reporting not required
- Employee notification of employer contribution, if made
- IRS reporting not required
- Annual employee notifications
Plan establishment deadline
Last day of the employer's taxable year; however, Safe Harbor plans have requirements for notice to eligible employees, which affects the plan establishment deadline:
- New plans: established before the October 1 notice due date
- Existing plans converting to Safe Harbor: established before the December 1 notice due date
Tax filing deadline of the business, including extensions for tax year deductions for the prior year
- April 15 for individuals, sole proprietors and partnerships (or 9/15 if extension filed)
- March 15 for corporations and subchapter (9/15 if filed an extension)
To fund for the current year, plan must generally be established by October 1 of that year for existing employers
Exception: For businesses created after October 1, the plan must be established as soon as administratively feasible (special rules apply)
Invest with advice when you need it
Invest with a licensed Merrill Financial Advisor, who can help you pursue your financial goals and plan for what matters most to you.
1 Can be reduced to as low as 1% in two out of any five years; compensation cap does not apply.
2 Contribution limits and benefits apply for 2016. Amounts for subsequent years may vary.
3 Employers must notify employees of eligibility to participate 60 days before they become eligible and then annually thereafter. Employers must distribute information pertaining to the following year’s employer contribution strategy by November 2 to accommodate the 60-day election period.
4 In order to fund the plan for the current year, the employer must establish the plan on or before October 1 of that year.