A traditional 401(k) or similar employer-sponsored retirement plan is a foundational savings tool for most Americans, yet those who are self-employed may not have access to these traditional savings methods. While you could still reap the tax benefits of contributing to a traditional or Roth IRA, the annual contribution limits are relatively low (less than one-third the limit of a 401(k)).
If you’re a small business owner looking to keep pace with your retirement savings goal (or elevate your employee benefits package), here are three alternative types of retirement savings accounts to consider.
Solo 401(k) Overview
A solo 401(k) is designed for business owners or solo entrepreneurs with no employees (other than a spouse). With a solo 401(k), you have the option to make contributions as both an employer and an employee, and the annual contribution limits parallel traditional 401(k) offerings.
For 2025, an employee can contribute up to $23,500 to their solo 401(k), with a $7,500 catch-up contribution for those 50 and older. A new feature for 2025 enables those who are between the ages of 60 and 63 (and still working) to contribute an additional $3,750 in catch-up contributions, bringing their total catch-up contributions to $11,250.¹
On the business side of things, as an employer, you can contribute up to 25% of your employee’s compensation. However, your total combined contribution cap (between your employee and employer contributions) is $70,000, or $77,500 for those over 50.
With a traditional solo 401(k), you have the advantage of deducting contributions from your taxable income for the year. The earnings within the account grow tax-deferred, and you only pay ordinary income tax when funds are withdrawn in retirement—this is how a normal 401(k) works as well. Alternatively, you have the option to contribute to a Roth solo 401(k), which is funded with income that’s already been taxed. The trade-off is that your qualified withdrawals in retirement will be tax-free.
Having tax-diverse income in retirement is important, and it’s not unusual for business owners to split contributions between both a traditional and Roth solo 401(k).
SEP IRA Overview
A Simplified Employee Pension (SEP) IRA is designed for self-employed individuals and small business owners looking for a straightforward, tax-advantaged way to save for retirement.
SEP IRAs are a fairly unique option on this list since contributions are made by the employer only, not the employee (much like a traditional pension plan). As the employer, you can contribute up to 25% of an employee’s salary (including your own, say if you’re the only employee), with a maximum contribution of $70,000 in 2025. To be eligible for an SEP IRA, employees must earn between $750 and $350,000 during the tax year.¹
Here’s the kicker with SEP IRAs: All eligible employees must be offered the same contribution rate. If you’re the owner and you want the company to contribute 20% of your salary to the fund, you must offer every employee that same 20% contribution rate. For that reason, SEP IRAs are often used by a solopreneur.
While the rate must be consistent across the company for all eligible employees, you do have the power to adjust the rate annually as needed, if utilizing this plan within a small business. This can be helpful if your cash flow is tight or unpredictable from year to year.
SIMPLE IRA Overview
The Savings Investment Match Plan for Employees (SIMPLE IRA) is designed for small businesses with 100 or fewer employees who earned at least $5,000 during the previous year. This may be an attractive option for those who want to provide employees with the ability to contribute to a retirement plan while keeping the administrative costs and general plan maintenance to a minimum.
Both employees and an employer can contribute to a SIMPLE IRA. Employee contribution limits for 2025 are set at $16,500, with a $3,500 catch-up contribution for those 50 and over. If you choose to offer a SIMPLE IRA, as an employer you must either:
- Make a “non-elective contribution” of at least 2% of all eligible employees’ compensation, or
- Match 100% of each employee’s elective contributions up to the first 3% of their compensation.
For example, if an employee makes $100,000, the employer can either:
- Direct at least $2,000 (2%) into the account via a non-elective contribution, or
- Match the employee’s contribution to the IRA, up to $3,000 (3%).
Benefits of Offering a Retirement Plan
Most people contribute to employer-sponsored retirement accounts because they offer attractive tax incentives—such as immediate deductions, deferrals on growth, and/or potentially tax-free income in retirement.
As an employee, any of the options shared above can help you grow your retirement savings in a tax-efficient manner. But as an employer, there may be some advantages to offering a retirement savings plan as well.
First, if you’re interested in attracting talented, motivated individuals to work for your company, you’ll need an attractive compensation and benefits package. A retirement plan is a common inclusion, even for small businesses.
In addition, employers with fewer than 100 employees may be able to claim up to $5,000 as a tax credit to cover the “ordinary and necessary costs” of getting a retirement plan up and running. This credit can be claimed up to three times, and it will reduce your final tax bill dollar-for-dollar (if you qualify).² If this applies to you, consider speaking to a tax professional to review all eligibility and filing requirements.
Need Help Deciding Between Plans?
Choosing the right plan will depend on your business structure, number of employees, and contribution goals. If you’re self-employed with no employees and want to maximize contributions, a solo 401(k) could be an appealing option. But for someone who has employees and wants to provide a simple, low-cost retirement option, a SIMPLE IRA may be more ideal.
We understand that trying to choose the plan that’s right for you, your business, and your employees can feel overwhelming. Knowing the differences between popular plan options like an SEP IRA, solo 401(k), and SIMPLE IRA can help you select the right option to support your retirement savings goal. If you’re unsure which plan is right for you, we invite you to reach out to our team. We’d be more than happy to discuss your retirement savings options as a small business owner.
Sources:
2. https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit
