Best Retirement Savings Options for Small Business Owners: Solo 401(k) vs. SEP IRA vs. SIMPLE IRA

As an entrepreneur or small business owner, you know that running your own business is a labor of love, but it can also be a financial rollercoaster. Between juggling day-to-day operations, managing employees (if you have them), and focusing on growth, it’s easy to push retirement savings to the back-burner.

However, planning for your retirement is not something you can afford to overlook. In fact, saving for retirement should be a priority, especially since you don’t have a traditional employer-sponsored retirement plan like many employees do.

The good news? There are retirement plans specifically designed for business owners, and they come with a variety of benefits to help you save more and reduce your tax burden. Whether you're self-employed or you run a small business with a few employees, the Solo 401(k), SEP IRA, and SIMPLE IRA offer flexible and tax-efficient ways to build wealth for the future. Let’s break down each of these options to help you determine which is the best fit for your business.

1. Solo 401(k): The Best Option for Business Owners with No Employees (Except Spouse)

A Solo 401(k), sometimes called an Individual 401(k), is an ideal retirement plan for self-employed individuals or small business owners with no employees other than a spouse. This plan allows you to contribute both as an employee and an employer, maximizing your retirement savings potential.

Key Benefits:

• High Contribution Limits: As both the employee and the employer, you can contribute up to $70,000 for 2025 with the possibility of contributing an additional $7,500 as a catch-up contribution if you're 50 or older. This dual contribution capability makes it one of the most powerful retirement savings tools for small business owners.

• Employee Contributions: As an employee, you can contribute up to $23,500 (for 2025), or $31,000 if you're 50 or older.

• Employer Contributions: As the business owner, you can contribute up to 25% of your compensation with total contributions not exceeding $70,000 ($77,500 if you're 50 or older).

• Tax Advantages: Contributions to a Solo 401(k) are tax-deductible, which can lower your taxable income for the year. You can also choose between a Traditional Solo 401(k) (tax-deferred) or a Roth Solo 401(k) (post-tax contributions with tax-free withdrawals in retirement).

When It Makes Sense:

• If you have no employees (other than your spouse) and are looking to maximize your retirement savings.

• If you’re self-employed and want the flexibility to make large contributions based on your income.

2. SEP IRA: A Flexible Option for Businesses with Employees

The Simplified Employee Pension (SEP) IRA is a popular retirement plan for self-employed individuals and small businesses with employees. It offers higher contribution limits than an IRA and is relatively easy to set up and maintain.

Key Benefits:

• High Contribution Limits: The SEP IRA allows you to contribute up to 25% of your net earnings (from self-employment), up to a maximum of $70,000 for 2025. This makes it an excellent choice for business owners with variable or high incomes.

• Employer Contributions Only: Unlike the Solo 401(k), only the employer can contribute to a SEP IRA. Employees do not make contributions, which can help simplify your bookkeeping.

• Easy Setup and Maintenance: SEP IRAs have minimal administrative requirements and are easy to establish. There are no annual filing requirements with the IRS, unlike other retirement plans like a 401(k).

• Tax Benefits: Contributions to a SEP IRA are tax-deductible, which reduces your taxable income for the year.

When It Makes Sense:

• If you have employees and want to provide them with a retirement savings option while benefiting from large contributions yourself.

• If you want an easy-to-manage plan with minimal administrative burden.

• If you have fluctuating or seasonal income and prefer flexibility in contribution amounts.

3. SIMPLE IRA: A Low-Cost, Easy Plan for Small Businesses with Employees

The SIMPLE IRA (Savings Incentive Match Plan for Employees) is another option for small businesses, but it’s designed for companies with fewer than 100 employees. The SIMPLE IRA offers lower contribution limits compared to the Solo 401(k) and SEP IRA; however, it comes with its own set of advantages, particularly for businesses that want to set up a simple and affordable retirement plan.

Key Benefits:

• Moderate Contribution Limits: For 2025, employees can contribute up to $16,500 to a SIMPLE IRA ($20,000 if you're 50 or older). Employers must match employee contributions up to 3% of each employee's compensation (or a flat 2% contribution for all employees, regardless of whether they contribute).

• Lower Setup Costs: The SIMPLE IRA is inexpensive to set up and administer. There are no annual filing requirements and the paperwork is minimal.

• Employer Contributions: Employers must contribute to their employees' SIMPLE IRAs. The match is flexible—either a 3% match of employee contributions or a 2% fixed contribution for all employees, even if they don’t contribute.

• Tax Benefits: Like the SEP IRA, contributions to a SIMPLE IRA are tax-deductible, reducing your taxable income for the business owner.

When It Makes Sense:

• If you have fewer than 100 employees and want to offer a simple, low-cost retirement option to your team.

• If you want to encourage employees to save for retirement but prefer a plan with manageable costs and administrative requirements.

How Much Should You Save for Retirement as a Business Owner?

The amount you should save for retirement depends on several factors, including your age, income, lifestyle goals, and when you plan to retire. As a general rule of thumb, aim to save at least 15% of your gross income each year. If you're self-employed, you may want to contribute even more, particularly in the years when your business is performing well.

You can leverage retirement calculators to get a clearer picture of how much you need to save to achieve your retirement goals. Keep in mind that as a small business owner, you have the advantage of maximizing your contributions to retirement plans like the Solo 401(k), SEP IRA, or SIMPLE IRA, depending on your business structure and income.

A Closing Thought: Which Retirement Plan Is Right for You?

Choosing the right retirement plan depends on the size and structure of your business, your income, and how much you want to contribute to your retirement savings each year. Here’s a quick recap:

• Solo 401(k): Best for sole proprietors or self-employed individuals with no employees, offering high contribution limits and tax advantages.

• SEP IRA: Ideal for businesses with employees (or just yourself) and higher incomes, offering flexibility and large contribution limits.

• SIMPLE IRA: A great option for businesses with fewer than 100 employees, offering an affordable and easy-to-manage retirement plan with moderate contribution limits.

It’s important to not let retirement planning fall by the wayside. By taking advantage of one of these retirement savings options, you can ensure a secure financial future while continuing to grow your business. Whether you’re just starting out or have been in business for years, it's never too early (or too late) to begin saving for retirement.

Ready to secure your retirement? Schedule a free Discovery Call with us today to explore which plan is best for your business and start building a solid financial future.