Did you start your business to improve your financial security? You’re not alone – according to a recent survey by American Express, 6 in 10 business owners say they were motivated to start a company to improve their financial stability and build generational wealth.
If one of your business goals is to build personal wealth, a small-business retirement plan should be near the top of your list. You may be able to save tens of thousands of dollars each year, tax-free.
For small-business owners, choosing a retirement plan can be daunting. How do you find the best option? And who should you ask for help?
What retirement plans should I be considering?
For small-business owners, the first decision is whether to save to a personal or a business plan, or both. For personal savings, you can use a Traditional IRA or Roth IRA. For business owners, the most common options are a Self-employed (SEP) IRA, SIMPLE IRA, or a 401k. (All links go to Investopedia, my trusted source for explaining business-finance concepts.) The tax rules for these retirement plans are the same across the US, but you may have additional mandated state requirements if you have employees.
How much can I save?
To contribute to a retirement plan, you must have earned income. That will either be your company’s profits or W-2 wages you pay yourself as an employee.
The maximum contribution amounts change each year and are set by the IRS. The new SECURE 2.0 Act creates extra savings opportunities as you get older. Your maximum contribution will depend on your plan type, company profit, and salary.
For 2025:
Traditional and Roth IRAs: $7,000 up to age 50; $8,000 50+
Contributing to a Roth IRA may not be available to you if you earn over $150,000 for single or head of household, or $236,000 for married couples filing jointly. Anyone can use a Traditional IRA, regardless of income.
SIMPLE IRA plans: $16,500 up to age 50; $20,000 50+
401k and SEP plans:
|
Age |
Employee Max |
Employer Max |
|
18-50 |
$23,500 |
$70,000 |
|
50-59, 64+ |
$31,000 |
$77,500 |
|
61-63 |
$34,750 |
$81,250 |
What should I consider when choosing and designing a retirement plan?
First, how profitable are you? What’s your savings goal?
If you’re not able to save more than the personal limit, then a Traditional or Roth IRA are often the place to start. Once you can save more, your profitability and savings goals may help you decide whether a SIMPLE, SEP, or 401k is the right choice.
While a SEP has the same maximum amounts as a 401k, your personal ability to contribute is capped based on your profitability or personal earnings. If you take a W-2 salary, you can contribute 25%. If you take distributions, it’s 20% of profits.
A 401k is not tied to your wages or profitability. If you’re making big investments into your business or paying yourself a relatively small amount, but you want to save a substantial amount, a 401k is often a better choice than a SEP.
Second, what kind of tax benefits are you looking for?
If you want to reduce the income taxes you pay today, you want a Traditional plan type, which lets you defer pre-tax money. If you’re open to paying the taxes now and never paying a dime on what you earn in the future, you want a Roth plan. SEP IRAs don’t have a Roth option. 401ks now provide both options in a single plan.
Third, do you have employees, or intend to hire soon?
When it comes to retirement plans, generally speaking, the more generous you can be with employees, the more generous the IRS is with you. If you want to max out your contributions at those $70,000-plus numbers, you’ll also need to contribute to your employees.
SEP plans are designed for the self-employed. They are challenging to administer when you have employees. However, you can put a waiting period of up to two years on your plan, which means you don’t have to make this decision the second you hire someone.
SIMPLE plans support employees, but have been overshadowed by 401ks, and also have significantly lower savings thresholds.
401ks are designed for employee participation and retention. They also consider fairness, so if you pay yourself a lot and want to save a lot, you’ll need to contribute to your team. Safe Harbor plans require you to contribute 3% of your team’s respective wages. Those contributions belong to the employee right away, even if they resign tomorrow.
If you make voluntary employer contributions, sometimes called profit-sharing contributions, those can have a vesting schedule over a period of years. You can also choose a waiting period for new hires of up to one year.
Finally, what’s your appetite for fiduciary (financial) responsibility and administrative overhead? What kind of investment options do you want within your plan?
In a 401k, you, as the plan sponsor, will be responsible for following the ERISA compliance standards for a retirement plan. You’ll work with a record keeper (the company that offers the plan) and a third-party administrator (the company that calculates and tracks fairness). You’ll be in charge of the plan design, costs, and selecting investment options.
SEP and SIMPLE are both brokerage-based IRA plans. Employees will have their own IRA brokerage accounts and can select their own investments.
When you consider your plan type, make sure to review it with your accountant to make sure you understand the costs and responsibilities as well as the tax savings!
Retirement savings deadlines
You can start a retirement plan at any point in the year. For all plan types, employer contributions can be made into the next year.
If you still want to save for 2024, you can contribute to personal retirement savings accounts until April 15, 2025, or when you file your taxes – whichever comes first. The contribution date needs to be prior to your tax filing.
If you want to add employer contributions to your 2024 business retirement plan, you can do so until your business tax filing deadline or when you file your taxes – whichever comes first. That includes extension deadlines. So your contribution for 2024 might be allowed as late as October 15, 2025.
If you don’t have a 401k set up by December 31, you can’t contribute for a past year. However, you can set up a SEP IRA until your business filing deadline. Check with your accountant for details. If you are starting a 401k this year, set that up as soon as possible so you can start making deferred salary contributions.
Other things to know about starting a retirement plan
401ks require significantly more compliance care and feeding than IRAs. Two ways to make it easier:
- Choose a plan that integrates with your payroll provider so the salary deferrals can be automated per pay period.
- Look for a combined record keeper and TPA.
Costs are also a significant factor. Some 401k providers tell you the plan is “free” for employers but then charge hefty administrative fees and investment fund “loads” (the finance word for “we take some money out of your savings to pay for this”). As a business owner, your benefits costs are tax-deductible. High fees eat away at your savings over time. Look for 401k providers who charge flat fees to the business and have low-load ETFs as investment options. By low, I mean less than 0.5%. Some index funds are as low as 0.17%.
One more thing: SECURE 2.0 created a tax credit for new 401k plans. Over the first three years of your plan, you can get a good portion of your administrative costs back on your taxes. Reminder: a tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.
Who should I call to get a 401k?
If it’s just you, and you don’t plan to have employees, talk to your financial advisor, the business banker at your bank, or a brokerage specialist. If you’re setting up a SEP IRA, most brokerage companies can help.
If you have a few employees, first check the integrated 401k options from your payroll provider. This will save you a lot of administrative effort. Our payroll partner, Gusto, offers five integrated 401k providers. We also offer HR setup services, including HR platform selection and setup, employment policies, and benefits. Schedule a consultation here to learn more.
If you have a larger number of employees – say, over 20 – and you’re starting to think not just in terms of your own tax and retirement savings but also company growth, retention, and recruiting, you’ll want to work with a retirement plan design specialist.
Even with support, it’s a good idea to revisit your plan every couple of years to make sure it’s still fulfilling your wealth goals. Ask yourself: what’s this retirement plan supposed to do for me and my business?
