Introduction
Running a business involves revenue, payroll, customer service, and decisions about retirement savings. Unlike employees who may have access to an employer-sponsored retirement plan, business owners may need to establish and fund their own retirement arrangement. Variable cash flow and business expenses can affect contribution timing and amounts.
Retirement plans for small business owners vary based on business structure, employee count, plan terms, and applicable IRS rules. Self-employed individuals, solo operators, and independent consultants and contractors may have access to options such as a Traditional 401(k), Solo 401(k), SEP IRA, SIMPLE IRA, or Safe Harbor 401(k).
Each plan has different contribution rules, tax treatment, administrative requirements, and available features. This guide explains how these retirement plan options work, including general eligibility considerations and contribution mechanics.
Why Retirement Planning Is Different for Small Business Owners
For many employees, retirement savings happen automatically through payroll deductions and employer-sponsored plans. Business owners may have different contributions and administrative responsibilities.
Business owners may be responsible for generating income, managing expenses, paying taxes, and establishing retirement contributions while operating the business.
In certain plan arrangements, a business owner may have both employer and employee roles for contribution purposes. This can affect contribution calculations and administrative requirements.
Business income may vary by year, which can affect contribution amounts and timing. Plan contribution rules and administrative requirements differ by plan type.
Self-employed individuals generally pay self-employment taxes on net earnings. Contributions to retirement plans may affect income-tax calculations but generally do not reduce self-employment tax.
Business structure matters as well. A sole proprietor without employees has different retirement planning options than a company with a growing team. Factors that may affect available plan options include:
- Number of employees
- Business income
- Contribution amounts
- Administrative responsibilities
- Availability of Roth contributions or participant loans
Retirement plan options differ in their contribution rules, tax treatment, administrative requirements, and available features.
The Best Retirement Plans for Small Business Owners
Retirement plans for small business owners have different eligibility requirements, contribution rules, tax treatment, and administrative responsibilities. Available plan types may depend on business structure, employee count, and plan terms.
The following sections describe common retirement plan options for small business owners and their general features.
Solo 401(k)
A Solo 401(k) is generally available to self-employed individuals and business owners with no eligible employees other than a spouse, subject to applicable plan and IRS rules.
A Solo 401(k) may allow contributions in both an employee and an employer capacity. Contribution limits and calculations are subject to annual IRS limits and applicable plan terms.
Some Solo 401(k) plans may allow Roth contributions or participant loans when permitted by the plan documents.
Best for:
- Sole proprietors
- Freelancers
- Independent contractors
- Owner-only LLCs and corporations
- Married business owners whose spouse works in the business
Pros
- Employee and employer contribution components
- Roth contribution options, when available under the plan
- Participant loan provisions, when permitted by the plan document and applicable IRS rules
Cons
- A Solo 401(k) is generally not available when the business has eligible employees other than a spouse.
- Plan administration and reporting requirements may increase as plan assets and business operations change.
For current contribution limits, always refer to the latest IRS retirement plan guidance rather than relying on previously published figures.
SEP IRA
A SEP IRA, or Simplified Employee Pension IRA, is an employer-funded retirement arrangement available to self-employed individuals and businesses of different sizes. Contributions are generally made by the employer rather than through employee salary deferrals.
Employer contributions may be discretionary from year to year, subject to the SEP plan document and applicable IRS rules.
Best for:
- Self-employed professionals
- Small business owners
- Businesses seeking simple administration
- Companies with variable annual profits
Pros
- Employer-funded contributions
- Employer contributions may vary by year, subject to applicable rules
- SEP plans generally have limited ongoing administrative requirements compared with certain employer-sponsored retirement plans
Cons
- SEP plans generally do not permit employee salary deferrals.
- Roth SEP contributions may be available when permitted by the plan document.
- Participant loan provisions are not available through a SEP IRA.
- Employer contributions for eligible employees generally must be allocated using the same percentage of compensation.
SIMPLE IRA
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is available to businesses with up to 100 employees, subject to applicable eligibility rules. It is an employer-sponsored retirement plan with administrative requirements that differ from a traditional 401(k).
Employees may make salary reduction contributions, while employers generally must make either matching or nonelective contributions, subject to plan terms and applicable IRS rules.
Best for:
- Small businesses with employees
- Growing companies that meet SIMPLE IRA eligibility requirements
- Employers offering payroll-based employee contributions
Pros
- Employee salary reduction contributions through payroll
- Required employer matching or nonelective contributions
- Administrative requirements that differ from many traditional 401(k) plans
Cons
- Contribution limits and catch-up rules differ from those that apply to a Solo 401(k).
- Employer contributions are generally required.
- SIMPLE IRAs have fewer plan design options than many traditional 401(k) plans.
- Employee eligibility, annual notice, and other administrative requirements may apply.
If you’re hiring employees but aren’t ready for the complexity of a larger retirement plan, a SIMPLE IRA can provide a practical starting point.
Safe Harbor 401(k)
A Safe Harbor 401(k) is an employer-sponsored 401(k) plan that includes required employer contributions and must meet specified plan and notice requirements.
When applicable safe harbor requirements are met, the plan is generally exempt from annual actual deferral percentage and actual contribution percentage nondiscrimination testing.
Best for:
- Businesses with eligible employees
- Employers sponsoring a 401(k) plan
- Businesses making required employer contributions under the plan terms
Pros
- Employee elective deferrals, subject to applicable IRS limits and plan terms
- Required employer matching or nonelective contributions
- Safe harbor provisions that may change applicable nondiscrimination testing requirements
Cons
- Employer contributions are generally required.
- Plan documents, employee eligibility, payroll administration, recordkeeping, and applicable reporting requirements may apply.
- Safe harbor treatment does not eliminate all plan administration requirements.
- Administrative requirements may differ from those of a SIMPLE IRA or SEP IRA.
For many businesses with employees, a Safe Harbor 401(k) offers a good balance between maximizing owner retirement savings and providing a competitive employee benefit. While it involves more administration than a SIMPLE IRA or SEP IRA, many employers find the added flexibility worthwhile as their business grows.
Solo 401(k) vs. SEP IRA: Which Is Better for Your Business?
A Solo 401(k) and a SEP IRA are retirement plan options for self-employed individuals and certain small businesses. Each plan has different eligibility requirements, contribution methods, administrative requirements, and available features.
The following table compares general features of each plan type.
| Feature | Solo 401(k) | SEP IRA |
|---|---|---|
| Best for | Self-employed individuals and business owners with no eligible employees other than a spouse, subject to applicable plan and IRS rules | Self-employed individuals and businesses, subject to plan terms and applicable IRS rules |
| Contribution method | Employee elective deferrals and employer contributions. | Employer contributions only. |
| Contribution limits | Subject to annual IRS limits for employee elective deferrals and employer contributions | Subject to annual IRS limits and eligible compensation |
| Roth option | May be available when permitted by the plan document and applicable IRS rules | May be available when permitted by the SEP plan document and applicable law |
| Participant loans | May be available when permitted by the plan document and applicable IRS rules | Not available through a SEP IRA |
| Administration | Plan documents, recordkeeping, and reporting requirements may apply | Employer contribution allocations and IRA-based account administration apply |
When a Solo 401(k) May Be Relevant
A Solo 401(k) may allow contributions in both an employee and employer capacity, subject to applicable IRS limits and plan terms. This contribution structure differs from a SEP IRA, which uses employer contributions only.
Some Solo 401(k) plans may allow Roth contributions or participant loans when permitted by the plan document and applicable IRS rules. A SEP IRA does not permit participant loans, and Roth SEP contributions may be available when permitted by the SEP plan document and applicable law.
When a SEP IRA May Be Relevant
A SEP IRA uses employer contributions and generally has fewer plan administration requirements than a Solo 401(k).
Employer contributions may be discretionary from year to year, subject to the SEP plan document and applicable IRS rules. Contribution amounts may vary based on eligible compensation and applicable annual limits.
The two plan types have different eligibility requirements, contribution methods, administrative requirements, and available features.
How Business Owners May Structure Retirement Plan Contributions
Retirement plan contributions may depend on business income, cash flow, plan terms, and applicable IRS rules. Contribution methods and timing vary by plan type.
Employee and Employer Contribution Components
A Solo 401(k) may permit contributions in both an employee and employer capacity, subject to eligible compensation, annual IRS limits, and plan terms. This structure differs from a SEP IRA, which uses employer contributions only.
Contribution Timing and Business Income
Business income may vary from year to year. Contribution calculations and timing may depend on the plan type, business structure, compensation, taxable year, and applicable IRS deadlines.
After-Tax Contributions and Roth Conversion Features
Some Solo 401(k) plan documents may permit after-tax contributions and Roth conversion features. This combination is sometimes described as a “mega backdoor Roth.” Availability and tax treatment depend on plan terms and applicable IRS rules.
A SEP IRA can be combined with a Roth IRA, converting the desired amount to Roth, since a Roth IRA doesn’t have a cap on conversion amount; this is also a strategy to use called the “mega backdoor Roth”.
Annual Contribution Limits and Plan Rules
Annual IRS limits apply to employee elective deferrals, catch-up contributions where applicable (there is no catch-up with a SEP IRA), employer contributions, and annual additions. Applicable limits and deadlines may change and depend on the type of plan and contribution.
Alternative Investment Options for Business Owner Retirement Accounts
IRA Club SBS allows alternative investments as an investment option within the retirement accounts provided. Examples of this can include:
Real Estate
A self-directed retirement account may hold certain real estate investments, including residential rental property, commercial real estate, raw land, and tax liens.
IRA-owned real estate must be held for the retirement account rather than for personal use. Purchase costs, expenses, income, and sale proceeds generally must be handled through the account. Transactions involving an IRA owner or another disqualified person may raise prohibited-transaction concerns under Internal Revenue Code §4975.
Private Lending
Self-directed retirement accounts may also hold private loans or promissory notes. These investments may require transaction documentation and arm’s-length terms. Loans or other transactions involving disqualified persons may be prohibited.
Cryptocurrency
A self-directed retirement account may hold cryptocurrency through eligible account arrangements, subject to applicable IRS rules, account terms, and qualified custodian requirements. Cryptocurrency investments may involve volatility, valuation considerations, and transaction-specific requirements.
AI-Managed Investing Through iFlip
IRA Club SBS provides access to iFlip. iFlip’s AI continuously analyzes market trends to protect your investments and capture opportunities, so you don’t have to time the market or pay high advisor fees. Learn more about iFlip.
Getting Started: Choosing the Right Plan for Your Business
Retirement plan comparisons may include business structure, employee eligibility, contribution methods, tax treatment, and administrative requirements. A plan available to an owner-only business may have different requirements than a plan established for a business with employees.
Common comparison points include:
- Employee count and eligibility: A Solo 401(k) is generally available to a self-employed individual or business owner with no eligible employees other than a spouse. SIMPLE IRAs and Safe Harbor 401(k) plans may be available to businesses with eligible employees.
- Contribution methods: A Solo 401(k) may allow employee elective deferrals and employer contributions. SEP IRA contributions are made by the employer.
- Roth contribution availability: Some Solo 401(k) plans may permit Roth contributions. Roth SEP contributions may also be available when permitted by the SEP plan document.
- Participant loan provisions: Some Solo 401(k) plans may permit participant loans when allowed by the plan document and applicable IRS rules. SEP IRAs do not permit participant loans.
- Administrative requirements: SEP IRAs, SIMPLE IRAs, and 401(k) plans have different documentation, employer contribution, notice, recordkeeping, and reporting requirements.
Ready to Choose the Right Plan?
Readers may estimate your retirement savings using selected contribution and planning assumptions. Calculator results are for informational purposes only.
For questions about IRA Club SBS and which retirement plan best fits your business, schedule a discovery call with our small business experts.
Frequently Asked Questions
What retirement plan options are available to small business owners?
Available retirement plan options depend on business structure, employee eligibility, contribution methods, plan terms, and administrative requirements.
A Solo 401(k) is generally available to self-employed individuals and business owners with no eligible employees other than a spouse, subject to applicable plan and IRS rules. A SEP IRA uses employer contributions and may be available to self-employed individuals and businesses, subject to plan terms and applicable IRS rules.
A SIMPLE IRA is available to eligible businesses with up to 100 employees and generally includes employer matching or non-elective contribution requirements. A Safe Harbor 401(k) includes required employer contributions and safe harbor provisions that may change applicable nondiscrimination testing requirements.
How much can a small business owner contribute to a retirement plan?
Contribution limits vary by plan type and are adjusted periodically by the IRS. For 2026, the elective deferral limit for a 401(k) is $24,500, and the defined contribution annual additions limit is $72,000, subject to applicable compensation, plan terms, and IRS rules. An additional $8,000 catch-up contribution may apply for eligible participants aged 50 or older.
A Solo 401(k) may allow employee elective deferrals and employer contributions, subject to applicable IRS limits and plan terms. SEP IRA and SIMPLE IRA contribution limits follow separate IRS rules.
What is a Solo 401(k) contribution limit?
A Solo 401(k) may allow employee elective deferrals and employer contributions, subject to applicable IRS limits, eligible compensation, and plan terms.
For 2026, the elective deferral limit is $24,500. An additional $8,000 catch-up contribution may apply for eligible participants aged 50 or older. The defined contribution annual additions limit is $72,000, subject to applicable IRS rules.
Do self-employed people have to pay Social Security and Medicare taxes on retirement contributions?
Retirement plan contributions may reduce income subject to federal income tax, but generally do not reduce net earnings subject to self-employment tax, including Social Security and Medicare taxes.
SEP IRA employer contributions generally do not reduce self-employment tax. Employee elective deferrals to a Solo 401(k) also generally do not reduce self-employment tax.
Tax treatment may depend on business structure, plan type, compensation, and applicable IRS rules. Consult a qualified tax professional for guidance specific to your business.
Can I invest my business retirement savings in real estate or alternative assets?
Yes, at IRA Club SBS, all of our retirement plans allow for alternative investing such as real estate.
The account holder directs investment selection and remains responsible for complying with applicable rules, including prohibited-transaction restrictions.
Disclaimer
Last Updated: June 2026
This article is provided for informational purposes only and does not constitute financial, tax, or legal advice. Retirement plan rules, contribution limits, and IRS regulations may change over time. Current IRS guidance may be relevant to plan-specific questions.
Tax, legal, and financial questions may require review by a qualified professional based on the applicable facts and circumstances.
