Ask an Advisor: Small Business Retirement Plans – Which One Fits Your Goals?

Ask an Advisor: Small Business Retirement Plans: Which One Fits Your Goals?

Choosing the right retirement plan for your small business starts with understanding your goals. Do you want to attract and retain employees with strong benefits? Or are you focused on maximizing your personal retirement savings and reducing taxes? Whether you have employees or are a solo entrepreneur, there’s a retirement plan designed to fit your needs.

Below are the most common small business retirement plan options and what you should know about each.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

A SIMPLE IRA is an easy-to-manage retirement plan for businesses with 100 or fewer employees. Both business owners and employees can contribute to a traditional IRA under this plan. As an employer, you must either:

• Match 100% of employee contributions up to 3% of their compensation, or
• Contribute 2% of each eligible employee’s compensation.

As the owner, you benefit by contributing both as the employer and the employee. SIMPLE IRAs have lower contribution limits compared to 401(k)s but are easier to set up and maintain, with no annual IRS filings or complex compliance testing required. This plan is ideal if you prefer a straightforward, low-maintenance option.

SEP IRA (Simplified Employee Pension)

The SEP IRA is another simple retirement plan where only the employer can contribute. Contributions must be made equally — the same percentage — to all eligible employees, including yourself. One major advantage is the flexibility: you can vary your contribution amounts year-to-year based on your business’s cash flow.

Like SIMPLE IRAs, SEP IRAs are easy to administer and do not require annual IRS filings or complex testing. They work particularly well for businesses with fluctuating profits.

401(k) and Profit-Sharing Plans

A 401(k) plan allows both employees and employers to contribute to individual accounts and offers higher contribution limits than SIMPLE or SEP IRAs. Employers can customize plans with features such as:

• Safe Harbor contributions to avoid IRS testing
• Roth 401(k) options for after-tax savings
• Automatic enrollment
• Profit-sharing options or discretionary matching contributions

Businesses are not required to make employer contributions every year but there must be a “substantial and recurring” contribution within three of the last five years.

Traditional 401(k)

A traditional 401(k) can significantly boost retirement savings due to higher contribution limits. Employers can also add profit-sharing contributions to reward key employees and strengthen retention by using vesting schedules.

However, business owners must act as fiduciaries under the Employee Retirement Income Security Act (ERISA), ensuring the plan is administered correctly. It’s essential to fully understand the administrative responsibilities and fees — both direct and indirect — which may include recordkeeping, investment management, and third-party administration costs. As many as 75% of small businesses are unaware of some plan fees, so careful evaluation of providers is critical.

Safe Harbor 401(k)

A Safe Harbor 401(k) plan simplifies compliance by automatically passing non-discrimination testing requirements. Employers must make mandatory contributions, either as a matching contribution or a nonelective contribution for all eligible employees.

This option is ideal for businesses with highly compensated employees who want to maximize their 401(k) contributions without restrictions.

Solo 401(k) (Individual 401(k))

If you are self-employed with no employees (or just your spouse), a Solo 401(k) allows you to contribute as both employee and employer, maximizing your retirement savings. Solo 401(k)s have the same benefits as traditional 401(k)s, including the ability to add a Roth component and take loans from the plan.

Cash Balance Plan

For profitable businesses led by owners over 50 who need to catch up on retirement savings, a Cash Balance Plan can be a game-changer. This type of defined benefit plan allows large tax-deductible contributions well beyond the limits of 401(k) and profit-sharing plans.

Cash balance plans can be paired with a 401(k) and profit-sharing structure to supercharge retirement savings while providing hefty tax deductions. Although contributions must be made for employees, owners typically receive the largest share.

Conclusion

Selecting the right retirement plan for your small business depends on your goals, business size, cash flow, and whether you have employees. Whether you want simplicity, flexibility, or maximum savings, there’s a plan that fits your situation. Consult with a retirement planning professional to customize the best strategy for you and your business.

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This article was originally published on Wealthtender and is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions. Wealthtender earns money from financial professionals, which creates a conflict of interest when these professionals are featured in articles over others. Read the Wealthtender editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.

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