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Small Business Owners and Self-Retirement Plans

Small Business Owners and Self-Retirement Plans

July 15, 2022
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Planning for retirement isn’t an easy task even for people who have worked for decades at one big company. As a small business owner, it can be even trickier since you have less traditional retirement plans to choose from. 

Your retirement plan options for a small business owner are typically going to be a SEP-IRA, a SIMPLE IRA, or a solo 401(k). Choosing the best one for you depends on several factors, such as how much income your business produces, how many employees your business has, and how much you can or want to contribute to employee retirement plans. 

Here are the pros and cons of the three most common retirement plans for small business owners:

SEP-IRA

A Simplified Employee Pension (SEP) plan allows employers to contribute to employees’ traditional IRAs, but a business of any size (even one without employees) can set up a SEP-IRA. SEP-IRAs are similar to traditional IRAs in that contributions grow tax-deferred until retirement. Distributions are then taxed as regular income.

Pros

Cons

  • Easy to set up and operate
  • Low administrative fees
  • Contributions to SEP-IRAs are tax-deductible. 
  • Employers can make contributions on a discretionary basis as revenue fluctuates.
  • Offers higher annual contribution limits than standard IRAs or 401(k)s
  • No filing requirement for employer
  • No nondiscrimination testing required
  • Employers are required to contribute the same percentage to each employee’s account, including their own.
  • Employees may not make their own contributions.
  • No catch-up contributions offered to pre-retirees age 50 or older

Ultimately, there are more pros than cons to a SEP-IRA. This option is well suited for business owners whose cash flow varies. The contribution flexibility rewards employees with greater contributions during times of high revenue without inconveniencing the employer during times of low revenue. 

SIMPLE IRA

A Savings Incentive Match PLan for Employees (SIMPLE) IRA plan is similar to a SEP-IRA in that it allows employers to make contributions to employees’ retirement plans at lower start-up and operating costs than other retirement plans. But with a SIMPLE IRA, employees can also make their own contributions to retirement, which can be less expensive for employers.

Pros

Cons

  • Easy to set up and operate
  • Low administrative fees
  • Contributions to SIMPLE IRAs are tax-deductible.
  • Includes catch-up contribution option for pre-retirees age 50 and older 
  • No filing requirement for the employer
  • No nondiscrimination testing required
  • Employer may not hold any other retirement plan.
  • Employer is required to make certain minimum contributions to employees’ plans each year.
  • Lower annual contribution limits

SIMPLE IRAs can be used by any small business but are typically limited to businesses that have 100 or fewer employees. SIMPLE IRAs allow employees to share in their own retirement funding, but employers have less flexibility in choosing how much to contribute annually.

Solo 401(k)

A solo 401(k) plan may be known by other names, such as an independent 401(k) or self-employed 401(k). This option may be best for sole proprietors because the only eligible plan participants are business owners and their spouses (if they are also employed by the business). However, this plan can be used by any small business, including corporations, LLCs, and partnerships.

Pros

Cons

  • Easy to set up and operate
  • Low administrative fees compared to regular 401(k) plans
  • Contributions to solo 401(k)s are tax-deductible (may not apply in all states for state income tax).
  • Offers highest possible contribution limits 
  • Includes catch-up contribution option for pre-retirees age 50 and older
  • No nondiscrimination testing required
  • Offers loan options up to a certain amount
  • May include filing requirement for employer
  • May not be eligible if you also contribute to an employer-sponsored retirement plan at another job
  • Hiring employees renders you ineligible for this type of plan.


This option may offer the most flexibility in terms of contribution limits for high earners who can afford to save more for retirement, but there are strict eligibility requirements to qualify for a solo 401(k). If you’re considering this type of plan, we encourage you to partner with a financial advisor who can help make sure you’re eligible.

You’re Not On Your Own

Choosing the right retirement plan for your small business depends on a number of complex factors, and this decision may be more difficult than you originally thought. At Heimensen Wealth Advisors, we specialize in helping small business owners make the best decisions for themselves and their businesses. If you see value in the delegation of financial matters to a professional, schedule an introductory meeting by calling 712-472-3867 or email corey@heimensenwealth.com.

About Corey

Corey Heimensen is owner and Accredited Investment Fiduciary® at Heimensen Wealth Advisors, a full-service financial planning and investment management firm serving pre-retirees, independent contractors, small business owners, and young families. With 30 years of experience, Corey believes that future success in life means that you have to conquer today, and he equips his clients to do just that through education, guidance, and customized strategies. Corey’s goal is to do his part to make his clients’ lives better, taking some of the financial burden off their shoulders so they can focus on what matters most to them. 

Corey is the author of Stop Doing Dumb Things With Your Money, and host of his new podcast, WIN—What’s Important Now, where he discusses planning strategies you can utilize now to help you build a financial path for tomorrow. Corey earned a degree in finance from Buena Vista University and resides in Rock Rapids, Iowa, with his wife and three children. When he’s not building his firm and working with clients, you can find Corey boating, reading, and attending sporting events. He loves anything related to basketball! To learn more about Corey, connect with him on LinkedIn and subscribe to his podcast.