Running your own business isn’t easy. More often than not, you must wear multiple hats at once. It’s easy to get caught up in the now, worrying about daily, weekly, and monthly goals and obligations, but far too often, we forget to focus on the future. For small business owners, that means thinking about retirement, their exit strategy, and their plans for the day they leave the business world to start a new chapter. 

There are numerous retirement plans available to business owners, including 401(k)s and IRAs, but many small business owners find that IRAs make more sense for their needs and business structure. Here’s everything you need to know about the best IRAs for small business owners and why you should consider setting up a retirement plan. 

Do I Need a Retirement Plan if I’m a Small Business

Yes, as a business owner, a retirement plan is an essential part of your long-term financial plan and your business’s exit strategy. That’s true even if you have no intention of stopping work or running your business well into your retirement years. 

With a retirement plan in place, you can focus on running your business and be prepared if you cannot maintain your business later in life. It also protects your family, especially if your spouse, partner, or dependents rely on you for income. 

5 Best Retirement Plans for Small Businesses

What should your small business retirement plan look like? That depends on several factors, including the type of business you have, how much you want to contribute annually, and your overall financial goals. Here are the top best IRAs for small business owners. 

1. SEP IRA

A SEP IRA is a simplified employee pension plan structured as a traditional IRA and designed for sole proprietors, small business owners, independent contractors, and other self-employed individuals.  You can open a SEP for your retirement saving needs and use it to open retirement accounts for your employees, though they will not be able to contribute to it. 

SEPs are more affordable and easier to administer than 401(k)s, making them a popular choice among small business owners who want to provide a retirement benefit but don’t want to deal with the fees and administrative complexities associated with a 401(k).  

Key features and benefits:

• Can contribute up to the lesser 25% of compensation or $66,000 (2023).
• Option to contribute as both employer and employee. 
• Tax-deferred. 
• Easy to administer.
• Lower fees when compared to a 401(k).

2. SIMPLE IRA

Savings Incentive Match Plans for Employees (SIMPLE) IRAs are designed to accommodate the retirement needs of both small business owners and their employees.  Unlike SEP IRAs, which only allow employers to contribute to their employees’ retirement accounts, both parties can contribute to a SIMPLE IRA. 

Key features and benefits:

• Contribute up to $15,000 annually ($19,000 if you’re 50 or older). 
• Available to employees who earn at least $5,000 annually. 
• Tax-deferred. 
• Easier to administer than 401(k)s.

3. Solo 401(k)

A Solo 401(k) is similar to a standard 401(k) commonly offered by employees, but it is designed for an individual, such as a small business owner, independent contractor, or sole proprietor. 

Unlike SIMPLE IRAs and SEP IRAs, this type of plan is not available to employees. In fact, IRS rules limit participation to small business owners without employees. 

As such, it’s not a wise choice if you currently have or plan to hire employees. However, if you are eligible for this type of plan, it is worth considering. That’s because it allows for dual contributions, as you can contribute as both employee and employer. 

Key features and benefits:

• Contribute up to $66,000 (2023), with an additional $7,500 available to those 50 or older. 
• Easier to administer when compared to standard 401(k)s.
• Roth and traditional accounts available. 
• Ability to make dual contributions as employer and employee.

4. Roth IRA

A Roth IRA is a standard individual retirement account that allows account owners to contribute after-tax dollars. Once in the account, funds grow tax-free, and you can take qualified distributions without penalties or taxes (Note: it’s withdrawn before age 59.5 that 10% early withdrawal can still apply though. See IRS topic No. 557). This is in contrast to a traditional IRA, which is tax-deferred, meaning funds grow tax-free while in the account, but taxes are deducted from distributions.  

Key features and benefits:

• Contribute up to $6,500 ($7,500 if you are 50 or older).
• Tax-free structure, as the account is funded with after-tax dollars.
• Access contributions without penalty if the account is at least 5 years old.

5. Self-Directed IRA

A self-directed IRA (SDIRA) is similar to a standard IRA but offers access to alternative investment assets, such as real estate, private equity, commodities, and precious metals. 

The account holder decides exactly how and when their funds are invested, giving more control over how they plan for retirement. 

Key features and benefits:

• Contributions are based on the type of account selected (e.g., Roth, traditional, SEP, SIMPLE, etc.).
• Tax structure depends on the type of account selected.
• Access to alternative assets that can potentially lead to higher earnings when compared to standard IRAs.
• Ability to invest in alternative assets can give some business owners an advantage, particularly if they are savvy or heavily engaged in a specific industry, such as real estate or commodities. 

Benefits of Starting a Retirement Account as a Small Business Owner

Starting a retirement account as a small business owner is a smart move, regardless of how many employees you have or what industry you’re in. 

Provides financial stability in later years.

One of the primary reasons anyone invests in a retirement plan is to provide financial stability in the years following retirement. 

As a small business owner, you may have plans to work well past the retirement age or have a succession plan that you feel will keep you afloat, even when you are no longer overseeing the business.  But as many of us know, life often follows a different playbook than the one we envision.  

Planning for retirement now can ensure you have something to fall back on later in life. It also gives you the freedom to decide what’s best for you and your family when deciding on retirement, even if it’s not the one you anticipated making.  

Attracts qualify employees

For many professionals, benefits can make or break a job offer.  If you’re looking to scout top talent for your business, then implementing a retirement plan is a wise move. That’s not always easy for small businesses, especially when you add in the cost of administering a common 401(k) plan. 

However, some IRAs for small business owners, such as SIMPLE and SEP IRAs, negate the pain points, making implementation more accessible. 

Unlocks retirement plan tax credits

Small business owners can take advantage of multiple tax credits, some of which are specific to retirement benefits.  Thanks to the Secure 2.0 Act, small businesses that implement a retirement plan may be eligible for the following credits:

Startup Tax Credit: 

The Startup tax credit is available to cover some of the essential costs of starting a SIMPLE IRA, SEP IRA, or a qualified plan, such as a 401(k).  The credit is available for each of the first three years of plan implementation. 

• Credit available:  50% of your eligible startup costs, up to $5,000 for three years. 
• Eligibility:  Small businesses with 100 or fewer employees who earn at least $5,000 in the prior year and at least one plan participant categorized as a non-highly-compensated employee (NHCE)

Retirement Savings Contribution Credit (Saver’s Credit)

Though not exclusive to business owners, the Saver’s Credit is available to eligible taxpayers who contribute to an IRA or employer-sponsored retirement plan. Plans can include solo 401(k)s and SIMPLE IRAs. 

Credit available: Varies based on your adjusted gross income (AGI), with the maximum being $2,000 ($4,000 if married and filing jointly). 

Eligibility: Must be 18 years or older and not claimed as a dependent on someone else’s tax return. Students are not eligible. 

Employer contribution tax credit

This SECURE 2.0 credit rewards small business owners who contribute to their employees’ retirement plans either via matching or profit-sharing contributions.  Potential expenses this credit can cover are the cost of employer contributions for the first five years of the plan. 

• Credit available:  50% of your eligible startup costs, up to $5,000 for three years. 
• Eligibility:  Small businesses with 100 or fewer employees who earn at least $5,000 in the prior year and at least one plan participant categorized as a non-highly-compensated employee (NHCE).

Auto-enrollment tax credit

As part of SECURE 2.0, employees offering retirement plans that were established after December 29, 2022, must include an eligible automatic contribution arrangement (EACA) by 2025. Once implemented, employers can receive a tax credit. 

Key details

• Credit available:  Up to $500 per year for three years. 
• Eligibility: Small businesses that implement an automatic contribution arrangement for the provided retirement plan. 

With these benefits in mind, it’s time to start exploring different retirement options so that you can find the best one for you and your business. 

FAQs

Is a 401(k) worth it for a small business?

A standard 401(k) can be costly to implement, both financially and administratively.  As such, whether or not it’s worth it often depends on the size of your business, your administrative resources, and your benefits goals.  

Self-directed 401(k)s provide ample freedom for investment with high contribution limits, making them a great choice for investors. 

It’s also worth considering other types of retirement plans, such as a SEP IRA or SIMPLE IRA.  If your goal is to set up a retirement for yourself and not your employees, a Solo 401(k) may fit the bill. 

How much can an LLC owner contribute to a 401(k)?

If you have a single-participant 401(k), such as a Solo 401(k), you can contribute up to $66,000, with an additional $6,500 in catch-up contributions available to investors who are 50 years of age or older. 

Can I contribute all of my salary to a Solo 401(k)?

You can contribute up to the lesser of $66,000 or 100% of your compensation to a 401(k) account, according to 2023 IRS guidance.  That means you can contribute 100% of your salary if you make less than $66,000.  

Remember that contribution limits can change annually, so always check the IRS website for the most up-to-date retirement account rules and regulations.