The Small Business Owner's Guide to Choosing the Best Retirement Account

Solo 401(k) - The Flexible Powerhouse

Best for: Solo entrepreneurs, freelancers, consultants with no employees

2025 Contribution Limits: Up to $70,000 ($77,500 if 50+)

• Employee deferrals: $23,500 ($31,000 if 50+)

• Employer contributions: Up to 25% of compensation

How Contributions Work:

• Employee deferrals: Limited to 100% of earned income or $23,500, whichever is less

• Employer contributions: Up to 25% of net self-employment income (after deducting ½ of self-employment tax) or 25% of W-2 wages if incorporated

• Combined limit: Cannot exceed 100% of compensation or $70,000 total

Key Advantages:

• Highest contribution limits for solo business owners

• Optional loan feature (borrow up to $50,000)

• Minimal administrative costs and paperwork

• Flexible contribution timing based on cash flow

Considerations:

• Must terminate if you hire employees (except spouse)

• Requires Form 5500 filing if balance exceeds $250,000

  
  

SEP-IRA - Simple and Scalable

Best for: Business owners with employees, variable income earners

2025 Contribution Limits: Up to $70,000 or 25% of compensation

How Contributions Work:

• Only employer contributions allowed (no employee deferrals)

• Limited to 25% of net self-employment income (after deducting ½ of self-employment tax) for self-employed individuals

• For employees: 25% of W-2 compensation

• All eligible employees must receive the same contribution percentage

Key Advantages:

• Easy setup and maintenance

• Can include employees with simple rules

• No required annual contributions

• Low administrative costs

Considerations:

• Must contribute equally for all eligible employees

• No loan options

• Only employer contributions allowed (no employee deferrals)

  
  

SIMPLE IRA - Employee-Friendly Option

Best for: Small businesses with 2-100 employees

2025 Contribution Limits: Up to $16,500 ($20,000 if 50+) plus employer match

How Contributions Work:

• Employee deferrals: Limited to 100% of earned income or $16,500, whichever is less

• Employer match: Choose either 2% of compensation for all eligible employees OR up to 3% matching contribution

• Eligibility: Employees who earned $5,000+ in any two prior years and are expected to earn $5,000+ in current year

Key Advantages:

• Lower administrative burden than 401(k)

• Employees can make deferrals

• Employer match requirement is modest (2-3%)

Considerations:

• Lower contribution limits than other options

• Two-year waiting period for penalty-free rollovers

• Required employer contributions

  
  

Traditional/Roth IRA - The Foundation

Best for: Anyone with earned income, especially as a supplement to other plans

2025 Contribution Limits: $7,000 ($8,000 if 50+)

How Contributions Work:

• Traditional IRA: Deductible if you don't have a workplace retirement plan, or if you do but your income is below certain thresholds (2025: $77,000-$87,000 for single filers, $123,000-$143,000 for married filing jointly)

• Roth IRA: Contributions made with after-tax dollars; income limits apply (2025: phase-out begins at $146,000 for single, $230,000 for married filing jointly)

• Contribution deadline: April 15th of the following year

Key Advantages:

• Available to almost everyone

• Roth option for tax-free growth

• No required distributions for Roth IRAs during lifetime

• Complete investment flexibility

Considerations:

• Low contribution limits

• Income restrictions for deductibility and Roth eligibility

• Early withdrawal restrictions

  
  

Defined Benefit Plan - Maximum Tax Shelter

Best for: High-income business owners 45+ with stable cash flow

Potential Contributions: $200,000-$400,000+ annually

How Contributions Work:

• Based on actuarial calculations considering age, income, and desired retirement benefit

• Annual contribution requirement regardless of business cash flow

• Must contribute for all eligible employees using same benefit formula

• Requires professional actuarial services to determine contribution amounts

Key Advantages:

• Highest possible contribution limits

• Guaranteed retirement income

• Massive current tax deductions

Considerations:

• High setup and administrative costs ($5,000+ annually)

• Mandatory annual contributions

• Complex actuarial requirements

• Best for consistent high earners
  

Quick Decision Framework

Based on Your Income Level:

Under $50,000: Traditional or Roth IRA, consider SEP-IRA if self-employed

$50,000-$100,000: Solo 401(k) if no employees, SEP-IRA if you have staff

$100,000-$300,000: Solo 401(k) for maximum tax deferrals

$300,000+: Consider Defined Benefit Plan for maximum tax savings

Based on Your Business Structure:

Solo Entrepreneur/Freelancer: Solo 401(k) typically offers the best combination of high limits and flexibility

Small Business with Employees: SEP-IRA for simplicity, SIMPLE IRA for employee engagement, or 401(k) for maximum benefits

Variable Income Business: SEP-IRA or Solo 401(k) for contribution flexibility

Established High-Income Business: Defined Benefit Plan for maximum tax advantages

Advanced Strategies

Combining Multiple Accounts

Many business owners benefit from using multiple retirement accounts:

• Solo 401(k) for maximum business contributions + Spousal IRA

• SEP-IRA for business + Personal Roth IRA for tax diversification

• 401(k) + Traditional IRA for employees not covered by the business plan

Conversion Strategies

• Convert traditional IRA funds to Roth during low-income years

• Use business losses to offset conversion taxes

• Strategic conversions before required minimum distributions begin

Estate Planning Integration

• Beneficiary designations for tax-efficient wealth transfer

• Roth accounts for tax-free inheritance

• Trust strategies for larger retirement accounts

  
  

Final Recommendations

For most solo business owners: Start with a Solo 401(k) for its high contribution limits and flexibility

For businesses with employees: SEP-IRA offers simplicity with good contribution potential

For high earners seeking maximum tax benefits: Investigate Defined Benefit Plans with professional guidance

For anyone: Don't overlook IRAs as foundational accounts or supplements to business plans

Start as early as possible, contribute consistently, and choose the account structure that best supports both your current tax situation and long-term retirement objectives. When in doubt, consult with a qualified tax professional or financial advisor who can analyze your specific situation and provide personalized recommendations.

This guide provides general information for educational purposes. Individual circumstances vary significantly, and you should consult with qualified tax and financial professionals before making retirement planning decisions.