Which Retirement Plan Is Right for My Business?
Retirement Plans for Business Owners
A retirement plan through your business does two jobs at once. It builds your own savings outside the business, and it can lower the tax you and the business pay each year. The right plan depends on how many people work for you, how much you want to save and how steady your income is. The wrong one can quietly cap what you're allowed to put away.
Why the choice matters
For a business owner, a retirement plan isn’t only a benefit for the team. It’s one of the best tools you have to build savings outside the business and lower your taxes at the same time. Contributions the business makes are generally deductible, and your own pre-tax contributions lower your taxable income.
But plans differ a lot in how much you can save, how much they cost, and what you must contribute for your employees. A plan set up years ago, when the business was smaller, may now be the wrong fit. Contribution limits change most years, so this guide compares the plans rather than listing this year’s numbers. The IRS publishes the new limits each fall.
The common plans, side by side
SEP IRA. The simplest plan. Only the business contributes, as a percentage of pay, and it must contribute the same percentage for every eligible employee. It’s easy to run and flexible from year to year, which suits owners with uneven income. With employees, it can get expensive, because they get the same percentage you do.
SIMPLE IRA. For businesses with up to 100 employees. Employees can contribute from their pay, and the business must either match or make a small set contribution for everyone. It’s inexpensive to run, but the amount you can save is lower than in a 401(k).
Solo 401(k). For an owner with no employees other than a spouse. You contribute both as the employee and as the employer, which usually lets you save more than a SEP IRA at the same income. Many allow Roth contributions too. Once you hire eligible employees, you’ll need a different plan.
Safe harbor 401(k). A regular 401(k) normally has to pass yearly tests that compare what the owners and highly paid employees save with what everyone else saves. If the team doesn’t save much, the owner’s contributions can be capped or refunded. A safe harbor plan avoids those tests: the business makes a required contribution for eligible employees, and in return you can save the full amount.
Cash balance plan. A type of pension that can be added alongside a 401(k). It allows much larger deductible contributions, especially for owners in their 50s and 60s who want to catch up. It requires steady contributions each year, an actuary and higher running costs, so it suits businesses with steady, strong profits.
How to choose
Four questions narrow it down quickly:
- Do you have employees, and how many? No employees points toward a solo 401(k) or SEP IRA. A growing team points toward a SIMPLE IRA or a 401(k).
- How much do you want to save? If you want to save more than a SIMPLE IRA allows, look at a 401(k), and if you want more than a 401(k) allows, a cash balance plan.
- How steady is your income? A SEP IRA lets you change contributions each year. A cash balance plan expects steady contributions.
- What do you want to provide your team? A good plan can help you keep your best people, especially alongside other benefits.
Whether to make pre-tax or Roth contributions is a separate choice, and it depends on your tax bracket now and later. See Roth or Traditional: Which Should I Choose?
Review it as the business grows
The right plan for a one-person business is rarely the right plan at 20 employees. Review your plan every few years, and whenever you hire, your income changes a lot, or you start thinking about your exit. Saving outside the business is one of the best ways to make sure your retirement doesn’t depend on one sale going well; see How Do I Plan My Exit From My Business?
Who does what
A plan administrator or recordkeeper runs the plan, and your CPA confirms the tax treatment and the deduction. We help you choose the plan that fits your goals, set how much to save each year, and invest the money as part of your whole plan.
The free Business Owner Tax Leak Audit checks your retirement plan, along with eleven other places tax may be leaking out of you and your business, in about five minutes. When you’d like to talk it through, we’re glad to meet, at no cost and no obligation. See how we work with owners on Owning a Business.
Quick answers
- What's the best retirement plan for a self-employed person with no employees?
- Often a solo 401(k), because it lets you contribute both as the employee and as the employer, which usually allows more savings at the same income than a SEP IRA. A SEP IRA is simpler to run. If you want to save more than either allows, a cash balance plan can be added.
- What is a safe harbor 401(k)?
- A 401(k) where the business makes a required contribution for eligible employees, either a match or a set percentage of pay. In return, the plan skips the yearly tests that can otherwise limit how much the owner and other highly paid employees can save.
- Can a business owner save more than a 401(k) allows?
- Yes. A cash balance plan, a type of pension, can sit alongside a 401(k) and allow much larger tax-deductible contributions, especially for owners in their 50s and 60s. It does require steady contributions every year and costs more to run.
- Are contributions to a business retirement plan tax-deductible?
- Generally, the business can deduct the contributions it makes, and your own pre-tax contributions lower your taxable income. Some plans also allow Roth contributions, which are taxed now and can come out tax-free later. Check how it applies to your business with your CPA.