Best Retirement Accounts for Small Business Owners

A SEP lets the business contribute to a traditional IRA (a SEP-IRA) for the owner and each eligible employee. Only the employer contributes; employees do not make salary deferrals into a SEP.

• Contributions are a percentage of pay, and under most SEP documents, including the IRS model Form 5305-SEP, everyone eligible gets the same percentage.
• You do not have to contribute every year, which suits uneven income.
• You can set up a SEP for a year as late as your business's tax return due date, including extensions.

Best fit: sole proprietors and small firms with irregular profits. The catch: eligible employees receive the same percentage you give yourself.

A SIMPLE IRA lets employees, including the owner, defer part of their pay, and requires the employer to contribute each year in one of two ways: a dollar-for-dollar match up to 3% of pay, or a 2% nonelective contribution for every eligible employee.

• Available to employers with no more than 100 employees who earned a set minimum in the prior year.
• A new plan is generally set up between 1 January and 1 October.
• An employer with a SIMPLE IRA generally cannot maintain another retirement plan at the same time.
• Withdrawals in the first two years of participation face a 25% additional tax instead of the usual 10%.

Best fit: small employers who want employees to save from their own pay while keeping costs and filings low.

A solo 401(k) covers a business owner with no employees, or the owner and their spouse. The owner contributes in two roles: as the employee, through elective deferrals, and as the employer, through a nonelective contribution based on compensation. Both count toward an overall annual limit.

• Because there are no other employees, the plan avoids nondiscrimination testing.
• The IRS lists designated Roth contributions as an option for these plans.
• Once plan assets reach a set level at year-end, the plan must file Form 5500-EZ.
• If you hire employees who become eligible, they must be brought into the plan.

Best fit: owner-only businesses, including S-corporation owners paid through payroll, who want room for larger contributions than a SEP allows at the same income.

A traditional 401(k) lets employees defer pay, and lets the employer add matching contributions, discretionary contributions, or both. Employer contributions can follow a vesting schedule, which rewards employees who stay.

The tradeoff is testing: each year the plan must pass the ADP and ACP nondiscrimination tests, which compare what highly compensated employees save with what everyone else saves.

Best fit: businesses with enough employees and budget to run a full plan and that want flexibility over employer contributions.

A safe harbor 401(k) works like a traditional 401(k), except the employer commits to a required contribution that is fully vested when made. That can be a match for employees who defer or a contribution for all eligible employees. In exchange, the plan is not subject to the complex annual ADP and ACP tests.

Employers must give employees a written notice before each plan year, within a window the IRS sets. Best fit: small businesses where the owner wants to defer the maximum without worrying that low participation by staff will cause a failed test.

A SIMPLE 401(k) combines 401(k) features with the SIMPLE contribution rule: the employer makes either a match up to 3% of pay or a 2% nonelective contribution, and those contributions are fully vested. The plan is not subject to the annual nondiscrimination tests.

Best fit: small employers who like the SIMPLE IRA's predictable contribution rule but prefer a 401(k) structure. Confirm your plan provider offers it.

A defined benefit plan promises a set benefit at retirement, and the employer must fund it. Each year an actuary determines how well the plan is funded and calculates the required minimum contribution. The IRS notes these plans allow larger contributions and deductions than other plan types.

Required contributions are due whether or not the business had a good year, and administration costs more than other plans. Best fit: owners with high, stable income who want to put away more than a 401(k) or SEP allows.

Roth is not a separate plan so much as a tax treatment you can layer on. Contributions are made after tax, and qualified distributions, including earnings, are generally tax-free.

• 401(k) plans, including solo 401(k)s, can offer a designated Roth account for employee deferrals.
• Under the SECURE 2.0 Act, an employer with a SEP or SIMPLE IRA plan can let participants choose Roth treatment, if the plan and the financial institution support it.
• A personal Roth IRA remains available alongside a business plan, subject to its own income rules.
• A distribution is qualified only after the five-year holding period and a qualifying event such as reaching age 59½.

Best fit: owners who expect a higher bracket later, or who want a mix of taxable and tax-free money in retirement.