Business Owner Retirement Plan Options
Fortunately, there is no shortage of retirement plan options available to business owners; however, choosing the best option requires a clear understanding of their business and personal financial situation. All these plans offer similar opportunities to achieve current tax savings while growing retirement assets tax-deferred. However, each has specific costs, limitations, and requirements ranging from simple and inexpensive to complex and pricey, so matching the right retirement plan option with your specific business and personal needs and priorities for optimum results is essential.
Here is a brief overview of the retirement plan options designed for small businesses:
SEP IRA
This is for businesses with only one or two employees
Advantages:
Easy to establish. Requires a straightforward form (5305-SEP).
Low cost, no fuss administration. Because employee accounts are self-directed, there’s no need for a plan administrator.
100% Employer contributions (not mandatory). This simplifies plan management and can provide an incentive to boost productivity. Contributions are not mandatory, so there’s no contribution if there are no profits. When profits increase, employees can be rewarded.
Large contributions. The maximum contribution limit is 25 percent of your net income up to the contribution cap of $70,000 in 2025 (indexed). An equivalent percentage contribution must then be made to employee accounts.
Disadvantages:
Employers make 100 percent of contributions to all employees. This shouldn’t be a huge hurdle for businesses with one or two employees, but if you plan to add many more, it can become more expensive than other plan options.
SIMPLE IRA (Savings Incentive Match Plan for Employees IRA)
For businesses with 100 or fewer employees
Advantages:
Easy to establish. If you want to control where your employees invest their funds, file form 5035-SIMPLE. If you want them to choose their own investments, file form 5034.
Low cost, no fuss. Employees make their own contributions.
Big Contributions. All employees can contribute up to $16,500 (2025). A “catch-up” provision allows employees aged 50 or older to contribute an additional $3,850.
Employer matches are tax deductible. An employer can match employee contributions of up to 3 percent of their total compensation, and it is fully tax-deductible as a business expense.
Disadvantages:
Mandatory employer contributions. The employer must make a matching employee contribution whenever contributing to his or her own SIMPLE IRA.
Small Contributions. Smaller than a SEP IRA or Solo 401(k), but still larger than an individual IRA.
Solo (Individual) 401(k)
For business owners with no full-time employees
Advantages:
Big Contributions. As an “employee,” the business owner may contribute up to $23,500 (2025) and an additional $7,500 for employees 50 or older.
Profit-sharing component. A profit-sharing component allows employers to contribute up to 25 percent of their net income (up to $70,000 in 2025 in years when they have a profit). The profit-sharing contribution is capped at 20 percent when combined with the “employee” contribution of $23,500.
Even bigger contributions. If you employ your spouse, he or she may make an employee contribution up to $23,500 ($31,000 for age 50 or older). Your spouse is also eligible for the profit-sharing contribution (up to 20 percent of his or her compensation).
Disadvantages:
More cost and fuss. A Solo 401(k) may require a plan administrator; however, costs associated with administering the plan are fully deductible business expenses.
IRS Reporting. If your combined plans exceed $250,000 each year, you will need to file Form 5500.
The best retirement plan option for small business owners is the one that can meet both their personal financial objectives and their business goals. Knowing where your business is headed is important for choosing a plan option that can be sustained for the long term. As with any tax-related issue, it’s highly advisable to seek the guidance of a tax professional experienced in qualified retirement plans when exploring your options.