What retirement plan should a business owner establish for his/her business? That all depends on the specifics of each business and the goals the business owner would like the retirement plan to accomplish. We will explore three of the more popular retirement plans for small business owners; the SEP IRA, SIMPLE IRA and Solo 401k, and when each may best apply depending on the business owner’s circumstances and objectives.

Maximize Retirement Plan Contributions

Business owners with no employees typically have fewer considerations because they do not have to comply with the discrimination testing rules regarding employee retirement plan contributions.  This allows the owner to focus on other features such as maximizing the allowable contributions. If this is the main objective, the Solo 401k will typically allow for the largest retirement plan contribution. Take for example a sole proprietor who has net earnings of $100,000 and is under 50. The maximum allowable contributions he/she would be able to make into a SEP IRA, SIMPLE IRA and a Solo 401k would be $20,000 (20% * $100,000), $15,500 ($12,500 + 3% of $100,000), or $38,000 ($18,000 + 20% of $100,000) respectively.

Why use a SEP IRA or SIMPLE IRA?

So why would a business owner choose to use a SEP IRA or SIMPLE IRA if they can’t contribute as much? Previously a Solo 401k had fees and administrative costs that SEP IRAs and SIMPLE IRAs did not. This has now changed as some providers have dropped these fees and costs. Solo 401ks are not allowed if you have any eligible employees (other than a spouse). So, if you have employees, or plan on hiring employees in the near future, your use of a Solo 401k will be limited. If you have employees, SEP Plans and SIMPLE Plans are an alternative to a traditional 401k plan. Both require a bit more paperwork than a solo 401k plan, but eliminate the discrimination testing requirement if you follow the rules.

What Plan Is Right For You?

There are many variables in deciding the appropriate retirement plan. We have highlighted a few of the considerations in the table below. Depending on how much you want to contribute for yourself or to other employees, the size of your plan, if you want to make Roth contributions, how concerned you are about creditor protection, or if you are approaching a deadline to establish a plan can all effect your decision. These are some key considerations but are not the only considerations. All three of these types of plans are common plans among small businesses because they are relatively simple and affordable options.  As a company’s plan grows or as the objectives of a plan become more specific and unique, further analysis is needed in determining the best plan to reflect the business owner’s goals.

Small Business Retirement Plans


Brett Spencer MS CFP®