Understanding Self-Directed Employer Plans and Which One Is Right For MY Business

Estimated reading time: 5 minutes(Last Updated On: June 18, 2021)

Self-employment can be a blessing and a curse! On one hand, you control your own hours and you can proudly say that you are your own boss, but the privilege of being in charge also comes with responsibilities and the important matters always fall on your shoulders. The good news is that being self-employed in the world of IRAs is great! As a small business owner, you have plenty of employer plan options! From the common plans like the SEP IRA and the Simple IRA to the powerful Solo 401(k), there are plenty of options to save for retirement that fit each accountholder’s needs.

But how do you know which one is best for you?

As you begin researching all the accounts and their difference and similarities, you’ll want to examine exactly where you stand and what you’re aiming to accomplish. Take a moment and ask yourself…”How many people do I employ?”, “How much am I looking to contribute?”, and “How much management am I willing to put in?” There are no wrong answers, but they are all important factors to take into consideration when reviewing your options.

There are three main self-employed plans: The SEP IRA, the Simple IRA, and the Solo 401(k), all which are offered at Quest Trust Company. Each plan has something special to offer, so below we have listed the important information you should know about each one.


The most common plan for self-employed individuals is the SEP IRA, or Simplified Employee Pension plan. Like the Traditional IRA, the plan allows for tax-deferred benefits for individuals who are self-employed, own a business, employ others, or earn freelance income. SEP IRA contributions are considered employer contributions, so the business makes them to you as the employee. SEP accounts are good accounts for business owners with one or just a few employees. Since you need to treat all employees the same as you, keep in mind that if you end up hiring people, qualified workers will receive the same percentage from your employer contribution as you do. With a 2020 contribution limit of up to $57,000 or up to 25% of your wages, this account is highly sought after for self-employed individuals who want to contribute a large portion to their retirement plan! Additionally, those contributions are tax-deductible, making this a great account for some!


The SIMPLE IRA is another plan, and there are many great similarities, and also differences, that make this another highly sought out self-directed employer plan. The taxes work the same way as a Traditional IRA account would, with the taxes being deferred, but contributions are able to be made by both employer and employee. Usually this plan is great for employers with about 100 or less employees. For contributions, the employer provides matching contributions up to 3% of the employee’s pay, not limited by any annual compensation limit OR make non-elective contributions equal to 2% of the employee’s compensation. One special characteristic that this plan has that the others don’t is it’s portability. When looking to move a SIMPLE IRA, employees must wait two years from the time they open the account before transferring those funds into another retirement plan. There may be a 25% early-distribution penalty if one were to withdraw money from a SIMPLE IRA during the two-year waiting period.

SOLO 401k

Lastly, one of the most powerful self-directed accounts is the Solo 401(k). Many people seek this account because of its many benefits, but it also has some downsides and things to be aware of. Something to note is that these plans are usually best suited to business owners who do not have any w-2 employees. As opposed to the other two plans, the Solo 401(k) boasts exemptions from certain UBIT tax, offers the ability to do loans to yourself, and even allows for checkbook control, arguably the most enticing. Additionally, the owner can make contributions as both employer and employee, allowing up to $57,000 in contributions, with a catch up contribution of $6,500 for those 50 or older. With so many positives, there will be negatives, too. One requirement is that the account holder has sole responsibility when it comes to tax reporting requirements; it’s important to make sure records are kept. Another important thing to note about the Solo 401(k) is that in order for it to be legitimized, the account holder must make a contribution in the year the account is opened. Once you have learned the benefits and dangers, deciding if the Solo 401(k) is right for you will be easy!

The main thing to understand and take away is that there is no one right employer plan. What works best for you may not be the most common, or the most well-known, but each employer plan has it’s unique benefits. And remember, one of the best things about employer plans is that you can use them for investing with your company, but if you want to create personal wealth for retirement, you can also have a Traditional IRA or a Roth IRA at the same time, allowing the best of both worlds! Once you have an idea of what you’re looking for, you’ll be able to measure which plan is the best fit for you, and if you ever need more information or help deciding which employer plan might be best for you, feel free to call a Quest Trust representative at 855-FUN-IRAs (855.386.47.27).

To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Want more information on how to invest with an employer plan? Check out this video about employer plans, who qualifies for them, and what it means for you and your small business.

One thought on “Understanding Self-Directed Employer Plans and Which One Is Right For MY Business

  1. Hi,
    I’m considering a Solo 401k since my wife and I own an LLC with rental revenue, and when I retire from the W-2 job in Jan 2022, I will get a significant pension lump sum I plan to rollover a Trad IRA and perhaps a Solo 401k.

    What are you fees associated with the Solo 401k? (creation, and on-going yearly)
    If I setup the 401k with checkbook account control, would Quest still be the custodian?

    Thanks (and you website very educational – Great Job!)
    Francois from San Antonio Texas

Leave a Reply

Your email address will not be published. Required fields are marked *