What Is the Best Retirement Plan for a Small Business?
Small business owners and their employees need to save for retirement, too. Learn how to find the best retirement account for your small business.
Key Takeaways
When small businesses offer retirement plans, it benefits the owner, the employees and the company.
SIMPLE IRAs and SEP IRAs are two popular options for small business retirement accounts.
These accounts have some key differences in contribution rules and limits to consider.
If you are a small business owner, you may wonder how to plan for retirement. After all, you don’t get a 401(k) or other retirement plan from an employer. Instead, you’re responsible for your own financial security in retirement. And if you have employees, you probably want to help them save for retirement, too. However, one obstacle is finding time to determine the best plan for your small business.
Fortunately, there are a number of options available for busy small business owners to plan for retirement. You can choose based on your business size and structure and whether you or your employees will contribute—or both. Here, we’ll explore two popular plans: SEP and SIMPLE IRAs, because they are relatively quick and easy to set up and maintain.
The Best Retirement Plans for Small Business Owners
As a small business owner with plenty of daily demands, retirement planning might seem overwhelming at first. But it is a must—for your own financial future and that of your employees.
Even though there are a lot of moving parts, retirement planning doesn’t have to be overly complicated or time-consuming. The following can help as you explore how to set up a retirement plan for your small business.
Why Does Your Small Business Need a Retirement Plan?
First, if you’re wondering whether your small business needs a retirement plan, the short answer is yes. It’s important to save for your own future but also help any employees you have plan for their retirement. Most people’s Social Security benefits are not large enough to cover their living expenses in retirement, and most workers no longer have pensions.
Offering retirement accounts for you and your employees can help maintain quality of life after you and they stop working. A retirement plan can be good for your business in the long run too because employees appreciate the benefit and the investment in their futures.
About half of small businesses in the U.S. have a retirement account for their employees, according to the Center for Retirement Research at Boston College . Offering a plan not only helps you and your employees prepare for the future, but it can also help differentiate your business from other small employers who don’t provide this benefit, boosting employee recruitment and retention.
In fact, our latest national survey of retirement plan participants found that the majority of employees prefer retirement contributions over education expense help. Employees especially appreciate automatic benefits to help them jump-start their savings and reduce stress about how much to save.
71% of employees want to be auto-enrolled in employee retirement plans at a 10% default.
Source: 10th Annual Survey of Retirement Plan Participants, American Century Investments, 2022.
What Retirement Plans Are Available for Small Business Owners?
There are a number of retirement plans for business owners available. But in particular, SEP and SIMPLE IRAs both offer tax-deferred growth. This allows investment gains to compound over time without incurring taxes until later. Taxes aren’t due until you withdraw the money in retirement when, for most people, the tax bracket is lower than when they are working.
SEP IRA stands for Simplified Employee Pension Individual Retirement Account.
SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account.
SEP and SIMPLE IRAs also offer less paperwork than some other retirement plan options. That’s why they’re both popular retirement plan choices for small businesses.
While SIMPLE IRAs and the SEP IRAs both provide ways for you and your employees to save for retirement, several factors influence which may be right for you. Next are some key aspects to consider as you explore how to choose the best retirement account for your small business.
Every contribution you make to your retirement plan—for yourself or employees—may be a tax deduction for your business. That can be good for your business’ bottom line.
Consider the Size of Your Business
SIMPLE IRAs can be set up by any employer with up to 100 employees earning more than $5,000 per year. If your business has more employees, you’ll have to opt for a different kind of plan. A SEP IRA can be used by any size business, including self-employed people who have no employees.
Understand Who Will Make Contributions and When
A key provision of small business retirement plans is who is actually contributing the money going into them, namely the employer or the employee, or both. Here, there are significant differences between SEP and SIMPLE IRAs.
With SEP IRAs, only the employer contributes to the plan, and it must be the same percentage for each employee.
For SIMPLE IRAs, the employer and employee both contribute. Employers must also either match up to 3% of participant contributions or make a 2% non-elective contribution of each employee’s salary.
A SEP IRA differs from a traditional 401(k) in that employees don’t contribute to a SEP account themselves. The employer makes the contributions, and generally, they must contribute the same percentage of salary for every employee. SIMPLE IRAs are more like 401(k)s in that both the employee and employer contribute—and the employer can match contributions.
Another difference between SEP and SIMPLE IRAs are discretionary versus non-discretionary employer contributions. Employers can choose to make SEP IRA contributions and they’re not required every year. If your small business has a rough year and you need to tighten your expenses, you could skip contributions that year. You could also be more generous during a more profitable year.
The SIMPLE IRA is different. Employers are actually required to contribute each year. And you can either match employee contributions dollar for dollar up to 3%, or give all employees a contribution up to 2% of their salaries, whether or not the employees contribute.
Saving for Your Own Retirement as a Small Business Owner
For SEP IRAs, the business owner can make contributions to their own account, but they’re subject to the same limits as all other employees. In addition, contributions for the business owner must generally be the same percentage as contributions made to employees’ SEP IRAs.
SIMPLE IRA employers contribute to their retirement at the same matching percentage as every other employee. The owner may also choose the percentage to contribute through a salary deferral just like employees.
Know How Much Money You Can Contribute
For a SEP account, an employer can contribute up to 25% of each employee’s salary pre-tax (or up to $69,000 in 2024, whichever is less) and must make contributions at the same percentage of salary for every employee.
Employees and small business owners are both also able to contribute to a traditional or Roth IRA, but contributions to a SEP IRA reduce the amount they can contribute to those other plans.
For SIMPLE IRAs, contributions can vary from year to year too. In 2024, the annual contribution limit to a SIMPLE IRA is $16,000. Workers over age 50 can make an additional catch-up contribution of up to $3,500 for a total of $19,500. (SEP IRAs do have higher contribution limits but don’t allow for catch-up contributions.)
With a SIMPLE IRA, employees can also contribute to a Roth or traditional IRA subject to income and contribution limits. In other words, contributions an employee (or their employer) makes to their SIMPLE IRA do not otherwise impact how much the employee can contribute to a Roth or traditional IRA.
Know Your Contribution Limits
SEP IRA
- 2023 – Up to 25% of each employee’s salary or up to $66,000, whichever is less.
- 2024 – Up to 25% of each employee’s salary or up to $69,000.
SIMPLE IRA - 2023 – $15,500. Employees over age 50 can make an additional $3,500 in contributions.
- 2024 – $16,000 with $3,500 in catch-up contributions for employees over age 50.
Keep Track of the Deadlines
Finally, when choosing the best retirement account for a small business, it’s important to know when you need to set up your plan.
The deadline to initially set up a SEP IRA plan for the first year is the business’s tax deadline plus any extensions.
A SIMPLE IRA plan must be established by Oct. 1 of the year the plan becomes effective.
Think About Next Steps
As you contemplate which kind of small business retirement plan might work best for you (and your employees), you’ll want to consider factors like whether or not you want to commit to making regular contributions to employee’s accounts and what kind of contribution limits you’re most comfortable with.
Whatever you decide, focusing on how to save for retirement as a small business owner can help prepare a stronger financial future for both you and your employees. By setting up a retirement plan, you’re also strengthening your company, since a solid retirement plan can improve employee recruitment and retention, as well as provide tax savings.
SEP or SIMPLE IRA—Which is Right for You?
Compare the two plans for your small business and learn how to decide which might fit best.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
If withdrawals are made within the first two years of participation in the SIMPLE IRA, the penalty increases to 25%.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.