Best Retirement Plans For The Self Employed or Small Business Owner

This is a guest post by Jeff Rose. Jeff Rose is an Illinois Certified Financial Planner and co-founder of Alliance Investment Planning Group.  He is also the author of Good Financial Cents, a financial planning and investment blog and he is currently working on his first book entitled Soldier of Finance.  You can see more about his mission at the same titled blog Soldier of

Are you a small business owner that is finally starting to see some profits?  You have been slugging away for several years and now you are finally in the black and you want to start thinking about retirement.  You know that you need to save, but as a business owner you have a such a multitude of different retirement plan options that as an individual you didn’t.  If you are confused and bewildered and not sure what direction to go, I completely understand.  It’s tough trying to figure what’s the best retirement plan for your small business.

I was in the exact same situation a few years ago.  I was a W-2 employee and when I became a small business owner I had many different options that I could choose from.  Initially it was very overwhelming.   It was easier helping clients decide what was best for them, but now that I was actually on the business owner’s side – the 1099 independent contractor side of things – I now wanted to make sure that I was doing the best retirement plan for me.  If you are looking to see what retirement plan is best for you, here are a few options to consider:

1. A traditional or Roth IRA.

Now I am sure you are probably wondering, “Well Jeff, I could do that when I was an individual.  What is the benefit for me doing it as a business owner?”  Well here’s the thing; the beauty of doing a traditional or Roth IRA, if you are not putting money in those plans at all, and maybe you are profitable but you are not as profitable as you would like to be, under the age of 50 and under you can still put in $5,000 on either the traditional or Roth IRA.  At least that is a good starting point.  Now, if you can put in more than that $5,000 then we’ll start looking at the other options coming up.

2. A Simple IRA.

The name is a little bit misleading because to me it is not quite that simple.  Here is the general gist: You’re able to put in up to $11,500 per year into the simple IRA.  Over the age of 50 is allowed a $2,500 catch up.  But if you have employees, here is where it gets a little bit trickier.  To make it simple, just know that you’re going to have to put in about 3% of your employees’ wages as an employer contribution.  That is how much, as a business owner, you’re going to be out for each employee.  There are certain rules that allow you to dip below that 3% over a 2-out-of-the-5-year period, but I don’t want to muddy the waters too much.  Now that might sound a little bit confusing and it kind of is, but if you check out my post on “Simple IRA rules“, you’ll find out more about the simple IRA and see if that applies to you.

3. The SEP IRA

If you have more than $11,500 to put in, the next option you might want to consider is what is called the SEP IRA (Simplified Employee Pension Plan).  A SEP IRA allows you to contribute the lesser of 25% of net earnings from self-employment or $49,000. Now that is a pretty good net clip that you can put away.

For me, as a business owner, that is the actual direction that I went.  The one thing I like about the SEP, especially for a business owner when you compare it to the Simple IRA and the traditional 401k, is that they are very cheap to set up.  To set up any of those plans you’re going to pay your annual IRA custodial fee, which is going to be somewhere in the neighborhood of $25-50 per year and that is it.  You will have to pay the cost associated with the investments inside that plan, but to actually get that set up it is very cheap.  There are no IRS filing documents.  There are no annual filing fees that you have to do with those plans, so that is why it is very popular.  The SEP IRA is the direction I went with my business and have done so for the last two and going on three years.

The only downfall with the SEP is that you can only do a percentage of your income, so you can’t just put in some arbitrary amount.  The other downside is if you have employees.  If, say, you’re going to do 20% of your income, then you have to do 20% of all your employees’ incomes that qualify for that plan.  There are certain discriminating rules that you can do that can leave certain employees out, but if they qualify then know whatever you do for yourself you’re going to be doing for them as well.  That can get fairly expensive for a business owner.

4. The 401k

If you have several employees and you’re looking to put more in and you don’t want to be held to that 20% standard, then the next step is looking at a traditional 401K.  The traditional 401K allows you to put in up to $16,500 and you can just put that in.  It doesn’t have to be a percentage of your income.  The basic 401K plan you don’t have to match for your employees.  If you want to do the $16,500 and that is all you want to put in and you don’t want to match for your employees, then that’s fine, you can do that.

If you want to start matching for yourself, then that is where it can get a little bit more complicated.  You can have what is called a profit sharing plan or a safe harbor 401K.  Basically what that means is if you want to be able to put more than that $16,500 per year doing employer contribution, then you have to follow certain testing rules to where what you put in for yourself has to be some type of prorated portion for your employees too.

5. Flying Solo

If you are an owner-only business you have another option that is called the solo 401K.  What makes this neat as opposed to the SEP IRA is this: You get to put in the $16,500 immediately, so right off the bat you’re not held to that percentage of income that you are with the SEP.  Furthermore, not only can you do the $16,500 in the 401K, but you can also do it in employer matching contribution, which then falls under that same 25% and 20% whether you are a C corporation or self-employed self proprietor of the net income.  So immediately you do the $16,500 in the owner only 401K, the solo 401K, and then you can add a matching contribution based off your net income.  All of the sudden, Bam!  You are putting that much more away in that solo 401K.

If there are any down sides to the traditional 401K or the safe harbor 401K or the solo 401K that I have mentioned, the one thing that I would say is cost.  With those you will have to file some type of IRS filing fee.  With the traditional 401K you have the form 5500 because it is an ERISA-powered plan, so therefore you will be held to different standards.   The cost will vary.  I have seen anywhere from $250 on up to $1500 depending on how big the plan is, how many different options you want to have and all that sort.  If that is something you are considering, I definitely encourage you to sit down with a financial advisor or a CPA that is skilled at setting up business retirement plans for you because you just want to make sure that you get it set up right.

If you are a business owner and you are looking to adopt some type of business retirement plan, those are a few of the options that you have and those are the most popular options that you are going to see. Good luck!

Jeff Rose is an independent financial advisor who loves Crossfit workouts, writes about Roth IRA rules and craves In-N-Out burger. You can follow his updates on Twitter: @jjeffrose.

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Published or updated November 12, 2013.


  1. So we’ve solved small business retirement, can we find a solution for health care insurance policies, as well? 😛

  2. Jessica S says:

    Great round-up of retirement options. Thanks for taking the time to put all of this together. 🙂

  3. The SEP IRA is an often overlooked retirement vehicle. I am glad that you mentioned it.

  4. Very interesting article! Thanks for submitting to the Carnival of Passive Investing this month! I had never heard of the Simple IRA and the solo 401k before reading this. I think that for my purposes as self employed blogger, I would most likely go with the SEP IRA!

  5. No Debt MBA says:

    Just wanted to note that you can do a self employed retirement plan like a SEP or Solo 401k AND a roth or traditional IRA if you meet the income limitations.

    I started a solo 401k a couple years ago with Fidelity and have been very satisfied with it.

  6. Jessica J. Drury says:

    How would I find a solo 401k?

  7. Hey thanks for sharing this discussion and really so informative and the fact is actually real and we all should plan our retirement before get retired.

  8. Nice Article. Thanks for sharing this post.

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