4 Retirement Plans Designed for Small Business Owners

Retirement Retirement Planning

By Kehan Zhou

Running a small business is challenging. From generating revenue to managing your employees, it’s easy to forget to take care of the most important person of all: you. Retirement, a distant worry, is not a priority for many small business owners. However, it’s hard to deny that retirement requires planning.

Fortunately, there are several retirement plans which are designed specifically for small business owners (with or without employees) to meet their unique retirement needs.

Retirement plans for smaller businesses

When you are an army of one, your time is precious, and you never seem to have enough of it. From accounting to marketing, all the burdens fall on your shoulders. That’s why saving for retirement should be simple and convenient. A solo 401(k) plan and a SEP-IRA are both great options designed to meet the retirement needs of solo entrepreneurs and business owners.

Solo 401(k) plan

As its name suggests, a solo 401(k) plan is designed for solo entrepreneurs. If you work for yourself with no employee,s you are eligible for a solo 401(k). If you have employees, you aren’t eligible for this type of retirement account. The only exception is given to your spouse, who may also work for your company and participate in this plan.

With a solo 401(k) plan, you can contribute up to $57,000 in 2020 to your retirement. Moreover, you can contribute to your solo 401(k) with either pre-tax dollars or post-tax dollars. A pre-tax contribution grants you tax-deferral on your savings, but you must pay taxes later when you withdraw during retirement. With after-tax dollar contributions, all your earnings and income are wonderfully tax-free.

Additional features:

  • You can contribute up to $19,500 as an “employee” (in 2020).
  • As an “employer,” you can make an additional contribution as high as 25% of your compensation or your net self-employment income. Sole proprietors and partners of LLCs need to use their net self-employment income instead of compensation to account for self-employment taxes and plan contributions.
  • Your spouse’s contributions follow the same rules. This allows you to potentially “double up” on contributions as your spouse has the same limits.


The SEP-IRA or Simplified Employee Pension Individual Retirement Arrangement is a retirement plan designed for small business owners with fewer than 100 employees. One immediate benefit of a SEP-IRA is that this plan is easy to set up, with no filing requirement from the employer. Upon closer inspection, SEP-IRA allows for a generous contribution limit of $57,000.

You can contribute to your SEP-IRA as both the employee and employer. However, there are two caveats to your contributions: First, your contributions as an employee will use the same contribution limit of all your IRA type accounts, a total of $6,000 in 2020. Second, when you contribute to your own SEP-IRA as the employer, you must contribute the same percentage for all your employees.

Because of this contribution rule, entrepreneurs tend to avoid SEP-IRA if they have employees. However, SEP-IRA’s generous contribution limit works great for solo entrepreneurs.

Additional features:

  • As the employer, you can contribute up to 25% of your compensation or $57,000 (whichever is lower).
  • All employees over age 21 and who have worked for you for three of the last five years must be eligible for employer contributions, if they receive more than $500 in compensation in the current year.
  • You must contribute the same percentage to your employees’ SEP-IRAs as you contribute to your own (e.g., if you contribute 10% of your salary to your plan, you must also contribute 10% of your employees’ salary to their plans).

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Retirement plans for growing businesses

Solo 401(k) and SEP-IRA plans work great when you have no employees. However, as your business grows, you need other plans to effectively cover you and your team. While you can consider a traditional 401(k), it comes with many administrative burdens. A SIMPLE IRA plan can be a great alternative for you.

SIMPLE stands for Savings Incentive Match Plan for Employees. There are two types of SIMPLE plans: SIMPLE IRA and SIMPLE 401(k). They are mostly similar with a few differences to cater to different business needs.


The SIMPLE IRA is an easy-to-use retirement plan and is available to employers with 100 or fewer employees. Setting up an SIMPLE IRA is easy. All you need to do is to sign an initial document and share an annual disclosure with your employees. The rest is taken care of by the financial institution you choose to oversee the IRA assets.

Both employees and employers contribute to SIMPLE IRAs. While employees can skip contributions, employer contributions are mandatory.

Additional features:

  • Employees may contribute up to $13,500 (in 2020). If you are age 50 or older, you can make an additional $3,000 catch-up contribution.
  • Under a SIMPLE plan, employer contributions are mandatory. You can choose to match employee contributions up to 3% of their compensation. Or you can choose a flat 2% nonelective contribution for each employee for the first $285,000 of their compensation.
  • SIMPLE IRA is easy to set up with minimal administrative burdens.

SIMPLE 401(k)

Similar to SIMPLE IRAs, SIMPLE 401(k)s are designed for businesses with less than 100 eligible employees. The contribution rules for SIMPLE 401(k)s are almost identical to SIMPLE IRAs.
While the SIMPLE 401(k) has more administrative requirements, it also allows the employees to take out loans on their 401(k) savings.

Additional features:

  • Employees may contribute up to $13,500 (in 2020). If you are age 50 or older, you can make an additional $3,000 catch-up contribution.
  • Employers with SIMPLE 401k plans can choose between a 3% matching contribution or a 2% non-elective contribution. Both contributions are subject to the $285,000 compensation cap.
  • You must file a Form 5500 each year
  • Loans are permitted.

It’s easier than it seems

Having a retirement plan for your business not only automates your retirement savings but also gives you valuable tax benefits. Additionally, offering retirement plans to your employees may encourage them stay longer with your company.

While setting up a retirement plan for your business can seem daunting, it is easier than it appears. With the help of these four small business retirement options, you can quickly set up a plan that works for you and your schedule.

RELATED: Best Retirement Investments That Produce Income

About the Author

Post by: Kehan Zhou

Kehan Zhou is a financial market expert and entrepreneur with years of experience in investment banking and fintech ventures. He is the founder of Wall Strategies, which offers light yet insightful investing and personal finance articles written by qualified Wall Street traders, investment bankers, and financial advisors.

Company: Wall Strategies
Website: www.wallstrategies.com
Connect with me on Twitter and LinkedIn.

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