Small Business Retirement Plans: Which is Right for You?


If you own your own small business, there’s no question about it: you’re a go-getter. You’re self-motivated and driven to do big things in your life.

You probably don’t wait for anyone to give you permission and you know how to take care of yourself.

For the most part, anyway. The truth is, 34% of entrepreneurs actually aren’t doing a good job taking care of their own financial futures. That’s how many of us don’t have a small business retirement plan.

That’s a big problem, because while you may love your business now, you probably don’t want to be stuck in it forever. Eventually, you’ll reach a point where you don’t want to work anymore — or you simply can’t.

Some small business owners plan on having their business continue on without their active, daily involvement and that could provide you with some degree of passive income. But skipping the retirement plan entirely puts you at risk for not having enough to live on in the future.

Don’t put the lifestyle you want at risk. Get the right small business retirement plan in place. You can start by evaluating one of these options.

Small Business Retirement Plans: Group 401(k) vs. SIMPLE IRA vs. SEP IRA

There are a number of plans you can use to stash away some cash for your retirement (or future financial freedom, however you prefer to look at it).

The ones I most often find myself recommending to my clients are 401(k)s, SIMPLE IRAs, or SEP IRAs. The right one for you will depend on the type of business you have, how many employees are on your team, and the kind of tax strategy you want to run.

In all cases, your contributions are tax-deductible as the employer (and you’re considered the “employer” even if it’s just you in your business and you don’t have employees). You may be able to get some tax credits that can help with your costs, too.

Here’s a quick breakdown of each so you can make an informed decision about which might be best for you.

Group 401(k)s

401(k)s for your business can be a great option for you and for your employees. If you don’t have a team, you can look at a solo 401(k) rather than a group plan.

Either way, these retirement plans come with big benefits, like high contribution limits ($18,500 max in 2018) and the ability to make pre- or post-tax Roth contributions. They also offer a ton of flexibility in terms of eligibility for employees, along with more vesting and distribution options.

One more thing to note about these 401(k) plans: they tend to be more costly than some of the other options for small business retirement plans. But this is your best bet if you have employees in your business.


Savings Incentive Match Plan for Employees, or SIMPLE, IRA is a plan that’s available to any small business with 100 or fewer employees. You can also use this plan if you’re a solopreneur and don’t have employees yet. You can contribute up to $12,500 in your SIMPLE in 2018.

If you do have employees and you choose a SIMPLE IRA, you’re required to make a matching contribution of 3% of compensation or a 2% non-elective contribution for each eligible employee, every year.

SIMPLE IRAs are easy to set up and come with low administrative costs, but making early withdrawals can leave you with some steep penalties.

If you take money out within the first 2 years of opening the plan, you’ll face a 25% penalty. For years after the first 2 but before you hit retirement age, the penalty is 10%.


SEP stands for Simplified Employee Pension Plan, and like the SIMPLE IRA, the SEP is easy to set up and inexpensive to manage. The nice thing about SEPs is that you don’t have minimum contributions you must make each year, which gives you more flexibility if your business cash flow varies.

SEP IRAs also come with high contribution limits, so when you do have the cash on hand you can save a good amount of it for your eventual retirement: up to 25% of your net self-employment income, or up to $55,000 — whichever is less.

The fact that you can evaluate whether or not you want to contribute to a SEP each year (and determine how much you want to put in year to year) is a great perk, but if you have employees, note that SEPs can get pricey.

Your plan has to include all eligible employees over the age of 21, who have worked for the employer in 3 of the last 5 years and received at least $550 in compensation throughout the year.

How to Choose and Open Your Retirement Plan as an Entrepreneur

A financial planner can evaluate the options and weigh the pros and cons of each plan against each other, and help determine what makes sense in context of the big financial picture. But to help you get started on choosing the right one for you, consider questions like:

  • Do you have employees? If not, you may be better off with a SEP or SIMPLE IRA.
  • Do you want the option to leverage your retirement saving for emergencies (before you reach retirement age)? You’ll likely face fees and penalties if you access any of your money early, but some plans come with heavier penalties than others and plans like the 401(k) offer “hardship” options and loans.
  • If you have employees, do you and your team need high contribution limits? If so, a 401(k) plan might be best for your business.
  • Do you need lots of flexibility with the design of your small business retirement plan? Again, a 401(k) might be the best way to go.

Once you decide what plan you want to use, it’s time to get started. You can set up any of these plans at just about any brokerage firm (think institutions like Charles Schwab, Fidelity, TD Ameritrade, or Vanguard).

Each institution will have a slightly different mix of options (and fees), so browse around and compare the options. Or, feel free to use my recommendation: I help my clients open these kinds of accounts at TD Ameritrade right now and have been happy with what TDA offers.

Want to chat more about what might be best for you? Click here to get started with a free 30-minute consultation, and I’ll help walk you through what to think about when it comes to your personal and business finances.

Mary Beth Storjohann, CFP® is an author, speaker, and financial coach who takes a fun, no-nonsense approach in working with individuals and couples across the country, helping them make smart choices with their money.

Follow me