Retirement Plans for Small Business Owners: Choosing the Right Plan for Your Company

As a small business owner, you are responsible for your own income, your own taxes, and your own retirement. Things that W-2 employees often take for granted because their employer handles much of it. One of the most important financial decisions you can make for yourself, and your business is setting up a retirement plan.

The good news is that the options available to you are genuinely excellent. You can shelter significantly more from taxes than most W-2 employees, and the right plan can benefit both you and your team. The challenge is that there are several plans to choose from, each with its own rules, contribution limits, and administrative requirements. Picking the wrong one can cost you.

That is exactly why this is a decision worth making with a financial planner, not just once, but revisiting as your business grows and changes.

Why Setting Up a Plan Is One of the Best Moves You Can Make

A retirement plan does two things that matter a lot when you run your own business. First, it allows you to build your own retirement savings in a tax-advantaged way, because unlike a W-2 employee, nobody is setting this up for you. Second, offering a plan to your employees can be a meaningful tool for attracting and retaining talent, and employer contributions are typically tax-deductible to the business. (Fidelity, 2026)

SECURE 2.0 also introduced new tax credits for small businesses that start a retirement plan, including a credit for plan startup costs and an additional credit for employer contributions made during the first few years. If you have been putting this off, the financial incentive to act has never been stronger. (IRS, 2026)

The Four Main Options for Small Business Owners

SEP IRA: Simple, High Limits, Easy to Start

The SEP IRA is one of the most popular choices for self-employed individuals and small business owners because of how simple it is. There are no annual filing requirements, contributions are flexible from year to year, and the contribution ceiling is high. For 2026, you can contribute up to 25% of eligible employee compensation or $72,000, whichever is less. (IRS, 2026)

There is one important rule to understand: if you have employees, you must contribute the same percentage of compensation for all eligible employees that you contribute for yourself. So, if you contribute 20% for yourself, you are required to contribute 20% for every eligible employee as well. For a solo operator this is no problem. For a growing business with a larger team, the cost can add up.

Best For

• Self-employed individuals or sole proprietors with no employees
• Business owners who want a high contribution limit with minimal paperwork
• Those who want flexibility since contributions are not required every year

Example: You are a self-employed consultant earning $200,000 in net self-employment income. A SEP IRA could allow you to contribute approximately $38,000, a meaningful reduction in your taxable income with very little administrative work required.

SIMPLE IRA: Built for Small Teams

The SIMPLE IRA is designed for businesses with 100 or fewer employees. Unlike the SEP IRA, it allows employees to contribute their own money through payroll deductions, which makes it feel more like a traditional workplace retirement plan. For 2026, employees can contribute up to $17,000, or $21,000 if age 50 or older. (IRS, 2026)

The employer match is required by law. You must either match employee contributions dollar for dollar up to 3% of their compensation or make a flat 2% contribution for all eligible employees regardless of whether they participate. This is the trade-off for the simplicity and lower cost compared to a full 401(k).

Best For

• Small businesses with employees who want to offer a retirement benefit
• Employers who want employees to participate in saving for their own retirement
• Business owners looking for a lower-cost alternative to a traditional 401(k)

One important note: the SIMPLE IRA has a two-year rule. Funds cannot be rolled over to another retirement account until the employee has participated for at least two years. Early withdrawals within that window carry a 25% penalty rather than the standard 10%.

Solo 401(k): Maximum Savings for the Self-Employed

The Solo 401(k) is available to self-employed individuals and business owners with no full-time employees other than a spouse. What makes it stand out is that you contribute in two capacities: as the employee and as the employer. This allows for very high total contributions relative to income. (IRS, 2026)

How the Contributions Work (IRS, 2026)

• Employee contributions: Up to $24,500 in 2026, or $32,500 if age 50 to 59 or 64 and older. If you are aged 60 to 63, the enhanced SECURE 2.0 catch-up brings it to $35,750.
• Employer contributions: Up to 25% of net self-employment compensation, on top of the employee contribution.
• Total limit: The combined employee and employer contributions cannot exceed $72,000 in 2026, or $79,500 if age 50 or older.

Example: You are self-employed and earn $150,000 in net income. As the employee, you contribute $24,500. As the employer, you contribute approximately $27,000 (25% of eligible compensation). Your total Solo 401(k) contribution for the year could be around $51,500, well above what a SEP IRA would allow at the same income level.

Additional Features

• Roth option: Many Solo 401(k) providers offer a Roth contribution option, which is not available in a SEP IRA. For business owners who want to build tax-free retirement income, this is a meaningful advantage.
• Loan provisions: Solo 401(k) plans may allow you to borrow against the account balance, which is not an option with a SEP or SIMPLE IRA.
• No employees allowed: The moment you hire a full-time W-2 employee other than a spouse, you can no longer contribute to a Solo 401(k) and will need to transition to a different plan.

Traditional 401(k): For Growing Businesses

A traditional 401(k) is the most robust option and the one most people are familiar with from larger employers. For a small business, it requires more administrative work than the other options, including annual nondiscrimination testing, potential third-party administrator fees, and compliance filings. But it also gives you the most flexibility in plan design. (IRS, 2026)

For 2026, employees can contribute up to $24,500, and the employer can add contributions on top of that up to the overall Section 415 limit of $72,000. Employer contributions are flexible. You can offer a match, a profit-sharing contribution, or both.

Best For

• Businesses with multiple employees who want to offer a competitive retirement benefit
• Business owners who want maximum flexibility in how employer contributions are structured
• Companies that are growing and expect to hire more employees over time
• Owners who want to offer the Mega Backdoor Roth strategy to key employees

Side by Side: Which Plan Makes Sense for Your Business?

Here’s a quick comparison of the four plans:

Why This Decision Deserves a Real Planning Conversation

Choosing the right retirement plan for your business is not just about picking the one with the highest contribution limit. There are several factors that can shift the answer significantly:

• How many employees do you have and do you plan to grow? A plan that works perfectly today can become expensive or structurally incompatible once you start hiring.
• How much do you want to shelter from taxes? The right plan depends heavily on your net income and how aggressively you want to reduce your taxable income each year.
• Do you want a Roth option? Not all plans support Roth contributions. If tax-free retirement income is a priority, that narrows the field.
• How much administrative complexity can you handle? A traditional 401(k) offers the most flexibility but requires the most ongoing maintenance. A SEP IRA is the opposite.
• What are your goals for your employees? If attracting and keeping good people is a priority, offering a meaningful match inside a 401(k) or SIMPLE IRA sends a different signal than a plan with no employee contributions.

These questions do not have universal answers, and the wrong choice can mean leaving significant tax savings on the table or creating obligations you were not prepared for. That is why working with a financial planner who understands both sides of this decision matter.

Beyond picking a plan, a good advisor can help you think through how the plan fits your overall financial picture: your personal retirement goals, your business cash flow, your tax strategy, and your long-term plans for the business. These things are all connected, and the retirement plan you choose today will affect all of them.

The Bottom Line

As a small business owner, setting up a retirement plan is one of the highest-leverage financial decisions you can make. It reduces your tax bill, builds your personal wealth, and if structured thoughtfully, can be a meaningful benefit for the people who work with you.

The options are genuinely good. The key is choosing the right one for where your business is today and where you want it to go, and making sure the plan you put in place is one that can grow with you.

Have questions about which retirement plan makes sense for your business? Let’s talk!

Disclaimer: This blog post is for educational purposes only and should not be construed as personalized financial, legal, or tax advice. Retirement plan rules, contribution limits, eligibility requirements, and administrative obligations vary by plan type and are subject to change based on IRS guidelines and applicable law. The suitability of any particular retirement plan depends on your individual business structure, number of employees, income, and financial goals. Please consult with a qualified financial professional and/or tax advisor before establishing or modifying a retirement plan for your business. All contribution limits referenced are based on 2026 IRS guidelines. A Roth IRA conversion—sometimes called a backdoor Roth strategy—is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you’re required to take a minimum distribution in the year of conversion, it must be completed before converting. To qualify for tax-free withdrawals, you must generally be age 59½ and hold the converted funds in the Roth IRA for at least five years. Each conversion has its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions. As of now, the backdoor Roth IRA is still around, but no one can predict its future. If you use this backdoor Roth strategy solely to sidestep the earnings limits on Roth, you need to be aware of the risks and seek the counsel and support of a tax professional. If the IRS decides that the loophole is a violation, if restrictions do come into play at some point, they could require backdoor Roth converters to pay a penalty, or they might include a grandfather clause. This information is not intended to be a substitute for specific individualized tax advice We suggest that you discuss your specific tax issues with a qualified tax advisor. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

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Jacob Campbell, CFP®

Jacob Campbell is a Paraplanner with Educo Advisor Group, where he assists with the financial planning process, day-to-day operations, and client services.

He graduated Summa Cum Laude in 2023 from California University of Pennsylvania with degrees in Accounting and Finance and a minor in Personal Financial Planning. During college, Jacob was a student-athlete on the soccer team, served as a student instructor for the finance department, and competed in the Financial Planning Association’s annual Financial Planning Challenge.

Jacob resides in Uniontown. Outside of work, he enjoys fishing, golfing, and coaching high school soccer.

Latest posts by Jacob Campbell, CFP® (see all)

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