The short answer
Small businesses commonly choose among a 401(k), a SEP IRA, or a SIMPLE IRA. They differ in who can contribute, how much paperwork is involved, and what the owner takes on. The right fit depends on your income, whether you have employees, and how much administration you are willing to handle.
The common plan types
| Plan | Often considered when | Things to weigh |
|---|---|---|
| 401(k) | You want flexibility in how employee and employer contributions work, or you are an owner-only business | More setup and ongoing administration; employer responsibilities apply |
| SEP IRA | You want a simple, employer-funded plan | Employer contributions generally must be extended to eligible employees on the same terms |
| SIMPLE IRA | You have a small team and want low administration | Contribution rules and employer match requirements are set by the plan type |
Owner-only businesses and couples
If your business consists of you, or you and your spouse, a self-employed 401(k) (sometimes called a solo 401(k)) may be worth a look. It generally allows contributions in two roles, as employee and as employer, which can make a higher total contribution possible than some other plans. Eligibility and limits are set by the IRS and change from year to year, so check current figures at irs.gov or with your tax professional.
What owners are responsible for
Sponsoring a plan makes the business owner a plan fiduciary. Depending on the plan, responsibilities may include:
- Selecting and periodically reviewing the plan’s investment options
- Making sure plan fees are reasonable for the services provided
- Depositing employee contributions on time
- Meeting annual testing and filing requirements
- Keeping plan documents and participant notices current
Many owners work with a plan provider, a third-party administrator, and an advisor to share this load. Outsourcing tasks does not remove the owner’s responsibility to oversee them.
Questions to settle before you choose
- Do you have, or expect to have, employees?
- How much would you like to save through the business each year?
- How much administration is realistic for you?
- Is your income steady enough for set contributions, or do you prefer flexibility?
- Would a more advanced option, such as a defined benefit plan, be worth discussing with a specialist? These plans carry additional administration and costs.
How we can help
Our founder holds the Chartered Retirement Plans Specialist (CRPS™) designation, and our team includes an IRS Enrolled Agent, so plan design and tax questions can be looked at together. As a fee-only, fiduciary firm, we accept no commissions from plan providers. Learn more about our Business 401(k) service, or read how enrolled agents and CPAs differ when you are building your tax team.
Retirement plans involve investment risk, including the potential loss of principal, and tax rules may change.
