Small business owners have several options to help themselves and their employees save for retirement. Understanding these options can empower you to choose the best plan for your business. Below is an overview of some popular retirement plans, their benefits, and key considerations:
Solo 401(k)
Also known as a self-employed 401(k), this plan is ideal for small business owners without employees (except a spouse). Freelancers, gig workers, sole proprietors, LLCs, corporations, and partnerships with no employees can benefit from its high contribution limits.
Key Features:
- Dual Contributions: Allows contributions as both employee and employer, maximizing savings potential.
- High Contribution Limits for 2025:some text
- Up to $70,000 if under age 50.
- Up to $77,500 for ages 50–59 or 64 and older.
- Up to $81,250 for ages 60–63.
- Employee Contributions: Up to $23,500 (pre-tax). Catch-up contributions add an extra $7,500 (ages 50–59 or 64+) or $11,250 (ages 60–63).
- Employer Contributions: Up to 25% of compensation (after Social Security and Medicare taxes), with a maximum compensation limit of $350,000 in 2025.
Example:
A consultant under 50 with $100,000 in earned income could contribute $23,000 as an employee and $18,587 as an employer, for a total of $41,587.
SEP IRA
A Simplified Employee Pension (SEP) IRA is an excellent option for small business owners who value simplicity and low administrative costs.
Key Features:
- Employer-Funded Only: Employees cannot make contributions.
- High Contribution Limits: Up to 25% of compensation, capped at $70,000 in 2025.
- Tax Advantages: Contributions are tax-deferred, and investments grow tax-free until withdrawal.
Eligibility:
- Employees must be at least 21 years old, have worked for the business for three of the past five years, and earned at least $750 in 2024 and 2025. Employers can set less restrictive rules but must apply them uniformly.
Considerations:
- Employers must contribute the same percentage of compensation for all eligible employees.
- Best suited for sole proprietors or businesses with few employees.
SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE IRA) is designed for small businesses with 100 or fewer employees.
Key Features:
- Employer and Employee Contributions: Employees defer salary pre-tax, while employers match contributions or provide a fixed percentage.
- Low Administrative Burden: No annual IRS filings required.
- Flexible Investment Options: Employees can choose from a range of investments, including mutual funds, ETFs, and bonds.
Contribution Limits for 2025:
- Employee Contributions: Up to $16,500. Catch-up contributions for ages 50–59 or 64+ are $3,500, and $5,250 for ages 60–63.
- Employer Contributions: Options include matching employee contributions up to 3% of compensation or contributing 2% of each employee's compensation regardless of participation.
Additional Considerations:
- Employers cannot offer other retirement plans if they provide a SIMPLE IRA.
- The SECURE Act 2.0 allows employers to contribute an additional 10% in a uniform manner, up to a maximum of $5,000.
Additional Benefits of Retirement Plans
No matter which plan you choose, offering retirement benefits provides several advantages:
- Tax Credits and Deductions: Offset administrative costs and reduce taxable income.
- Employee Retention: Attract and retain talented employees by offering valuable benefits.
- Personal Retirement Savings: Secure your financial future while helping your employees build theirs.
Choosing the Right Provider
Popular providers include Fidelity Investments, Vanguard, Charles Schwab, Merrill Lynch, and Morgan Stanley. Payroll companies like ADP and Paychex also offer integrated retirement plan options.
By evaluating your business needs, employee demographics, and financial goals, you can select a retirement plan that aligns with your objectives while simplifying the process for you and your team.
