Save Taxes and Boost Employee Loyalty with Small Business Retirement Plans

Advantages of Retirement Plans

The most common retirement plans for small business owners with just a few employees are the SIMPLE IRA, the SEP IRA and the solo 401(k). The solo 401(k) is popular with businesses that have no employees other than the owner or the owner and his or her spouse. Each of these choices is a defined-contribution-style pension plan, rather than a traditional plan. Defined contribution plans involve more risk to the plan beneficiary, since the plan sponsor is not promising a specific level of benefits. These plans have a number of advantages for business owners:

• They come with high contribution limits. You can participate in these plans even if your income disqualifies you from making deductible contributions to a traditional IRA or any contributions to a Roth IRA.

• Self-employed individuals and small business owners qualify for tax credits designed to offset the costs of setting up a small business retirement plan. These credits are worth up to $1,500.

• Contributions are pre-tax (with the exception of a Roth 401(k)).

Solo 401(k)s

These plans are stripped-down variants of the 401(k) we’re familiar with, often offered by large employers. They come with the same generous contribution limits, the same tax advantages and the same protection from creditors as the full-sized 401(k). However, these plans are designed to be inexpensive to set up and maintain and place lighter administrative burdens on plan sponsors.

Solo 401(k) plans may be suitable for businesses with no employees other than the owner and a spouse.  Click here to learn the maximum contribution amount allowed for this year, as well as the “catch-up” contribution amount for those over age 50. 

Your business can also make additional contributions on your behalf, up to 25% of compensation for each spouse.

SEP IRAs

The Simplified Employee Pension Plan (SEP IRA) is designed to be an uncomplicated solution for small business owners, sole proprietors and independent contractors to set up and maintain. Participants can set aside up to 25% of compensation, up to a limit of $70,000 per year in 2025 (up from $69,000 in 2024).

Once you set up a plan, you have discretion over whether you contribute to it. But you must offer the same benefits across the board to all qualified employees who’ve been with your company at least three out of the previous five years and who have earned at least $750 over the year (unchanged from 2024). Due to this requirement, SEP IRA’s are ideal to the business owner with no employees or long-term independent contractors.

SEP IRA contributions don’t count against your IRA contribution limit. You are allowed to fully fund a traditional or Roth IRA and a SEP IRA in the same year, without penalty.

SIMPLE IRAs

A SIMPLE IRA allows a small business owner to set up a retirement plan for up to 100 workers at a time. With this plan, employees defer a portion of income pre-tax to the SIMPLE IRA, and their contributions compound tax-deferred until retirement or until they take a distribution, similar to a 401(k) plan.

Employers can match a portion of employee contributions (up to 100% of 3% of the employee’s compensation. Allowing for economic fluctuations, employers also have the option to reduce the matching contribution to 1% in two out of any three years). Alternatively, employers can elect to provide a flat contribution of 2% of each qualified employee’s contribution each year.

These plans have similarities to the 401(k) plan, except there are fewer administrative requirements on the part of the plan sponsor. This plan may be suitable for employers who are interested in the Solo 401(k), but who have employees other than the owner and spouse, or who plan to do some hiring in the future.

For more information on small business retirement plans, see IRS Publication 560, “Retirement Plans for Small Business,” or consult your benefits adviser.

©  2025