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Retirement Savings Plans for Small Business Owners: Where to Start?

By April 16, 2021Blog/Videos

Saving for retirement can be challenging in the best of conditions. Throw in the fact that you are a small business owner, though, and the challenges get can downright intimidating. Not only are you saving for your own retirement without the cushy benefits of a company run 401(k), but you’re often in charge of providing retirement savings opportunities for your employees.

Many small business owners shrink away from the responsibility of creating retirement savings plans for themselves and their employees. Some never do it at all. After all, it’s just one more thing to worry about and frankly it isn’t necessary for the daily operations of a business.

Saving for your own retirement and providing your employees with ways to save for theirs is no joke, however. Yes, it’s a pain to learn about the different types of plans available to small business owners and their employees. Believe me, though, your future will thank you.

Where Do I Start?

The best way to start figuring out how to structure a retirement plan for your small business is to answer some basic questions. This will narrow down your choices and help ensure that you aren’t wasting time researching plan types that don’t fit your unique situation.

1.     Is your business a sole proprietorship, a partnership, a corporation, or an LLC?

2.     How many employees do you have?

3.     Do you want to set up plans for your employees?

4.     Are you more concerned with maxing out contributions or keeping administration simple?

Simplified Employee Pension Plan i.e. The SEP IRA

If you’re a sole proprietor and want a plan that is easy and cheap to set up and maintain, a SEP IRA might be a good fit for you. As of 2018, a SEP IRA allows you to contribute up to 25% of your compensation to a max of $55,000 per year.

A SEP IRA also allows you to create plans for your employees if you desire. In this set up, employees do not make contributions themselves as SEP IRAs are completely employer funded. It’s important to note that funding employee retirement accounts through a SEP can be expensive. You do not have to contribute to your own SEP every year, but if you do you are required to contribute the same percentage to your employee’s plans.

The SEP IRA is the most popular type of retirement plan for small business owners. Its relatively low fees and easy set up are attractive options.

Savings Incentive Match Plan for Employees i.e. The SIMPLE IRA

The SIMPLE IRA is available to all business types with fewer than 100 employees. It’s usually the most promising option for business owners who want to allow employee participation. Under a SIMPLE IRA an IRA account is created for each employee. As of 2018, employees can make contributions up to 100% of their compensation up to $18,500.

In a SIMPLE IRA situation, employers also contribute to employee accounts, but generally not as substantially as they would for a SEP IRA. With the SIMPLE IRA employers can choose to match employee contributions up to 3% or contribute a flat 2% of each employee’s compensation.

From an administrative angle, the SIMPLE IRA is a bit more complicated to set up than a SEP IRA. Employers who can’t afford to contribute high dollar amounts to their employee’s accounts and want employees to be able to make their own contributions often find it the best option despite this.

Self-Employed 401k Plan i.e. The SOLO 401(k)

For business owners who have no employees aside from themselves and their spouses, the SOLO 401(k) is a popular option. This option is open to sole proprietors, partnerships, C corporations, and S Corporations and appeals to those who want to max out their contributions.

A SOLO 401(k) allows employee contributions of 100% of compensation with a cap of $18,500 in 2018. For people 50 or older, the cap is $24,500. In addition, you can make employer contributions of up to 25% of your compensation with a cap of $55,000 as of 2018.

The SOLO 401(k) often works well for business owners without employees who want to put as much money towards retirement as possible. Sometimes these business owners are finding financial success later and life and need to catch up. Or they might be anticipating a few years of solid income followed by a drop and want to save as much as they can while they can. Whatever the case, the high contribution limits on the SOLO 401(k) are hard to pass up.

Is It Worth It? Convince Me!

The reasons why small business owners should set up some kind of retirement plan are too numerous to count.

Not saving for retirement or saving into the wrong type of plan can have unpleasant consequences for you and any employees you have. Not only are you potentially missing out on all the benefits of a stable retirement, but you might be losing important tax credits and deductions for your business. If you’re looking to hire additional employees in the future you also might find it hard to compete with businesses that can offer attractive retirement plans.

What Do I Do Now?

Even if the contributions you are able to make are minimal, consider taking the time to set up a retirement plan for your small business. Research your options and approach your financial planner. They’ll know how to set up the best plan for your business or will direct you to someone who can.

If you don’t have a financial planner, reach out to one in your area who specializes in small business retirement plans. Vector Financial Solutions serves North County San Diego including Escondido, San Marcos, Poway, Rancho Bernardo, and 4S Ranch and has helped many clients craft plans to fit their needs. Call 760-741-3159 or visit their website at

David Wilson, writer at Financial Truths, is also a financial advisor and Certified Financial Planner® at Vector Financial Solutions, Inc. Vector Financial Solutions is located at 139 E. 3rd Ave., Escondido, CA 92025 and by phone at 760-741-3159.


The post Retirement Savings Plans for Small Business Owners: Where to Start? appeared first on North County San Diego Financial Truths.

David Wilson is a Certified Financial Planner® and Accredited Investment Fiduciary Analyst® at Vector Financial Solutions and the author of this blog. He has spent the last 30 years helping people in the greater San Diego area accomplish their financial goals and envision their best financial future. Call 760-741-3159 or email to get in touch.

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