Planning
Retirement Accounts for Business Owners
Business owners have access to retirement plans far more generous than any employee gets, and a large proportion of them contribute nothing at all, on the reasoning that the business is the retirement plan.
Key points
- Owners can shelter considerably more than the standard employee limit — you contribute as both employee and employer.
- A Solo 401(k) usually allows the largest contribution at a given income, but only while you have no eligible non-spouse employees.
- A SEP-IRA is the simplest to run, but contributions must be made at a uniform rate for every eligible employee.
- Retirement contributions reduce income tax. They do not reduce self-employment tax.
- Plans have establishment and funding deadlines that differ from each other — missing them costs you the year.
“The business is my retirement plan”
It is a reasonable-sounding position and a concentrated bet. It assumes the business will still be valuable when you want to stop, that a buyer will exist, that the sector has not shifted, and that your health and circumstances allow you to choose the timing. Plenty of businesses are sold well. Plenty are wound down for a fraction of what the owner assumed, or cannot operate without the owner and therefore cannot be sold at all.
A retirement account diversifies that risk into assets entirely independent of your business, with three advantages that a business sale does not offer:
- Immediate tax relief on contributions to pre-tax plans
- Tax-deferred or tax-free growth over decades
- Meaningful creditor protection for qualified plan assets, which is worth serious attention for anyone personally guaranteeing business debt
Contributing does not require abandoning the business as a wealth strategy. It means not having your entire net worth in one illiquid asset that depends on your continued presence.
Solo 401(k): usually the largest capacity
A Solo 401(k) — also marketed as an individual or one-participant 401(k) — is available to a business with no employees other than the owner and their spouse. Its advantage is structural: you contribute in two capacities.
- As employee, an elective deferral up to the standard annual limit, with an additional catch-up amount once you reach the qualifying age.
- As employer, a further contribution calculated as a percentage of compensation, subject to an overall combined annual cap.
All the relevant figures — deferral limit, catch-up, employer percentage and the combined ceiling — are adjusted annually [VERIFY: current-year 401(k) elective deferral limit, catch-up amounts, employer contribution percentage and overall defined contribution limit, irs.gov].
Because the employee deferral is a flat amount rather than a percentage, the Solo 401(k) is particularly effective at moderate income levels, where a percentage-based plan would allow far less.
Other features worth knowing
- A Roth option is available in many plans, allowing after-tax contributions that grow tax-free.
- Loans are permitted by some plan documents, unlike SEP or SIMPLE IRAs.
- A spouse who genuinely works in the business can participate, roughly doubling household capacity.
- An annual return becomes required once plan assets exceed a specified threshold [VERIFY: current plan asset threshold requiring Form 5500-EZ, irs.gov].
Hire an employee who meets the plan's eligibility conditions and the Solo 401(k) no longer works as a one-participant plan. You must either convert to a full 401(k) with the associated testing and administration, or move to a different plan. Anticipate this before hiring rather than after.
SEP-IRA: simplest to operate
A SEP-IRA is funded entirely by employer contributions — there is no employee deferral. The contribution is a percentage of compensation up to an annual dollar ceiling, both of which are set each year [VERIFY: current SEP-IRA contribution percentage limit and annual dollar cap, irs.gov].
Its virtues are administrative. Establishment is straightforward, there is generally no annual filing requirement, and contributions are entirely discretionary year to year — you can contribute generously after a strong year and nothing after a weak one, which suits variable income.
The employee problem
If you have eligible employees, you must contribute the same percentage of compensation for each of them as you do for yourself. Contributing a high percentage for yourself means doing so for everyone eligible, which for a business with several employees becomes expensive quickly.
Eligibility rules include service and compensation conditions that allow some genuinely marginal workers to be excluded [VERIFY: current SEP eligibility requirements — age, years of service, minimum compensation, irs.gov], but you cannot simply exclude employees you would rather not fund.
Because the SEP is percentage-based with no flat deferral, it typically allows a smaller contribution than a Solo 401(k) at moderate incomes, converging only at higher ones.
SIMPLE IRA: for small teams
A SIMPLE IRA is designed for businesses below an employee-count threshold. Employees may make salary deferrals up to an annual limit, and the employer must contribute — either a match up to a specified percentage for participating employees, or a fixed non-elective percentage for all eligible employees [VERIFY: current SIMPLE IRA employee deferral limit, catch-up, employer match/non-elective percentages and employee-count threshold, irs.gov].
It is easier and cheaper to administer than a full 401(k) and imposes a lighter employer cost than a generous SEP, which makes it a reasonable middle option for a small team. The trade-off is a lower deferral ceiling for the owner than a 401(k) provides, and there are specific restrictions on early withdrawals and rollovers within the initial participation period.
Choosing between them
| Solo 401(k) | SEP-IRA | SIMPLE IRA | |
|---|---|---|---|
| Who it suits | Owner only, or owner and spouse | Self-employed, or small teams | Small employers with staff |
| Employee contributions | Yes | No | Yes |
| Employer contributions | Yes, discretionary | Yes, uniform rate | Yes, mandatory |
| Relative capacity | Highest at moderate income | Percentage-based only | Lowest of the three |
| Roth option | Commonly available | Limited | Limited |
| Loans | Often permitted | No | No |
| Admin burden | Moderate | Lowest | Low |
| Works with employees | No, not as a solo plan | Yes, at a cost | Yes |
A rough decision path: no employees and you want maximum shelter — Solo 401(k). No employees and you want minimum administration — SEP-IRA. A small team and you want to offer a plan without heavy cost — SIMPLE IRA. A larger team — a conventional 401(k), which is more affordable than it used to be.
Very high earners
Owners with substantial, stable profit who are behind on retirement saving should ask an advisor about a defined benefit or cash balance plan. These allow contributions well beyond defined contribution limits, particularly for older owners, at the cost of actuarial administration and a commitment to fund the plan consistently. For the right profile they are the most powerful shelter available.
Details that cost people money
Retirement contributions do not reduce self-employment tax. They reduce income tax. Owners frequently assume a large contribution shrinks the whole tax bill; the self-employment layer discussed in the tax guide is unaffected.
Establishment and funding deadlines are different things, and differ by plan. Some plans must be established by a date that may fall before the deadline for funding them. Miss the establishment date and the option is gone for that year regardless of available cash [VERIFY: current establishment and funding deadlines for Solo 401(k), SEP-IRA and SIMPLE IRA, irs.gov].
Contributions are calculated on net self-employment earnings, not gross revenue, and the calculation for an unincorporated owner is circular — the contribution affects the earnings figure it is based on. Use a proper calculator or your accountant rather than estimating.
An account is not an investment. Money contributed and left in cash is not working. Choose an allocation deliberately.
Consider the Roth question. Pre-tax contributions save tax now; Roth contributions produce tax-free retirement income. If you expect materially higher income later, or simply want certainty about future rates, splitting between the two is a defensible hedge.
Health savings accounts are worth a look. If you hold a qualifying high-deductible health plan, an HSA offers a rare combination of deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses [VERIFY: current HSA contribution limits and high-deductible health plan qualifying thresholds, irs.gov].
Educational information only. This guide explains how US business finance generally works. It is not financial, tax, investment or legal advice, and it does not account for your circumstances. Tax figures change annually and rules vary by state — anything highlighted for verification must be confirmed against current IRS or state guidance. Consult a qualified professional before acting. See the full disclaimer.