3 Most Common Retirement Plans for Small Business Owners

Maura Schauss |

By Todd I. Youngdahl, CFP®

When you’re a small business owner, you’re in charge of your own retirement plan. You have several options to choose from, such as a SEP-IRA, a SIMPLE IRA, or a Solo 401(k). The option you choose should depend on several factors, including:

  • How much income your business produces
  • How much you want to save for retirement
  • Whether your small business has employees
  • How much you can or want to contribute to employee retirement plans

To help you decide, we describe the pros and cons of three options for small business retirement plans below: the SEP-IRA, the SIMPLE IRA, and the Solo 401(k). Although these are not the only options, they are three of the most common. It’s important to work with an experienced financial advisor to ensure you’re making the right decision for you and your business.

  1. SEP-IRA

A Simplified Employee Pension (SEP) plan allows employers to contribute to employees’ traditional IRAs, but a business of any size (even one without employees) can set up a SEP-IRA. SEP-IRAs are similar to traditional IRAs in that contributions grow tax-deferred until retirement. Distributions are then taxed as regular income.

Pros

  • Easy to set up and operate
  • Low administrative fees
  • Contributions to SEP-IRAs are tax-deductible.
  • Employers can make contributions on a discretionary basis as revenue fluctuates.
  • Offers higher annual contribution limits than standard IRAs or 401(k)s
  • No filing requirement for employer
  • No nondiscrimination testing required

Cons

  • Employers are required to contribute the same percentage to each employee’s account, including their own.
  • Employees may not make their own contributions.
  • No catch-up contributions offered to pre-retirees 50 or older

Ultimately, there are more pros than cons to a SEP-IRA. This option is well suited for business owners whose cash flow varies. The contribution flexibility rewards employees with greater contributions during times of high revenue without inconveniencing the employer during times of low revenue.

  1. SIMPLE IRA

A Savings Incentive Match PLan for Employees (SIMPLE) IRA plan is similar to a SEP-IRA in that it allows employers to make contributions to employees’ retirement plans at lower start-up and operating costs than other retirement plans. But with a SIMPLE IRA, employees can also make their own contributions to retirement, which can be less expensive for employers.

Pros

  • Easy to set up and operate
  • Low administrative fees
  • Contributions to SIMPLE IRAs are tax-deductible.
  • Includes catch-up contribution option for pre-retirees 50 and older
  • No filing requirement for the employer
  • No nondiscrimination testing required

Cons

  • Employer may not hold any other retirement plan.
  • Employer is required to make certain minimum contributions to employees’ plans each year.
  • Lower annual contribution limits
  • 25% tax on withdrawal within first 2 years of plan


SIMPLE IRAs can be used by any small business but are typically limited to businesses that have 100 or fewer employees. SIMPLE IRAs allow employees to share in their own retirement funding, but employers have less flexibility in choosing how much to contribute annually.

  1. Solo 401(k)

A Solo 401(k) plan may be known by other names, such as an independent 401(k) or self-employed 401(k). This option may be best for sole proprietors because the only eligible plan participants are business owners and their spouses (if they are also employed by the business). However, this plan can be used by any small business, including corporations, LLCs, and partnerships.

Pros

  • Easy to set up and operate
  • Low administrative fees compared to regular 401(k) plans
  • Contributions to Solo 401(k)s are tax-deductible (may not apply in all states for state income tax).
  • Offers highest possible contribution limits
  • Includes catch-up contribution option for pre-retirees 50 and older
  • No nondiscrimination testing required
  • Offers loan options up to a certain amount

Cons

  • May include filing requirement for employer
  • May not be eligible if you also contribute to an employer-sponsored retirement plan at another job
  • Hiring employees renders you ineligible for this type of plan

This option may offer the most flexibility in terms of contribution limits for high earners who can afford to save more for retirement, but there are strict eligibility requirements to qualify for a Solo 401(k). If you’re considering this type of plan, we encourage you to partner with a financial advisor who can help you make sure you’re eligible.

How We Help

Choosing the right retirement plan for your small business depends on a number of complex factors, and this decision may be more difficult than you originally thought.  If you are a small business owner, we can help you weigh your options to make the best decisions for you and your business. Schedule online with us, call 703.584.2700 or email clientservices@washingtonwealthadv.com today to see how we can help!

 

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