Many small business owners want to offer their employees retirement benefits but cannot manage the cost or complexity associated with pension plans or traditional defined employer contribution plans, like 401(k) plans. Fortunately, there are three types of retirement plans designed with small business and startups in mind: the Simplified Employee Pension (SEP) plan, the SIMPLE Individual Retirement Account (IRA) plan, and the Solo 401(k) plan (sometimes referred to as an “owner-only” or “Individual” 401(k) plan). While each benefit plan has different characteristics and can be used to accomplish different goals, they all have important qualities in common as well. Each is simple, easy to administer, relatively inexpensive, and can help business owners and their employees reach their retirement savings goals. Learn more below!
Simplified Employee Pension (SEP) Plans
SEP plans allow any type of employer to contribute toward their employees’ retirement through a plan that is easy to set up with almost no administrative costs, no compliance testing, and no government reporting. Contribution limits apply per IRS rules for a SEP IRA. Each year, the employer may contribute as much as 25% of an employee’s compensation, up to $70,000 (for 2025) for each eligible employee, including the business owners. The maximum compensation that can be considered for contributions is $350,000 (for 2025). Employers can choose each year whether to make a contribution and may vary the contribution amount from year to year. This flexibility can be beneficial to a business with uncertain cash flow.
The money contributed to a SEP IRA is pre-tax. However, because only the employer can make contributions, it's the plan sponsors and not the employee that enjoys the upfront tax benefits. The money in a SEP IRA grows tax-deferred, or the SEP IRA can be converted to a Roth IRA so retirement income can grow tax free. It is important to note that SEP IRA distributions during retirement are subject to ordinary income taxes.
SIMPLE IRA Plans
Like a SEP plan, a SIMPLE IRA plan is easy to establish, has no government reporting or compliance testing, and low administrative costs. SIMPLE IRA plans are only available to small businesses, generally 100 or fewer employees. Unlike SEP plans, which are funded exclusively by employers, SIMPLE IRA plans permit both employer and employee contributions. Each year, employees can defer up to $16,500 (for 2025), plus an additional $3,500 (for 2025) catch-up contribution if they are 50 or older. Employers are required to make either a three percent matching contribution or a two percent nonelective contribution for each eligible employee.
Solo 401(k) Plans
A Solo 401(k) plan allows self-employed individuals with no employees to maximize their retirement account contributions. Each year, business owners can defer up to $23,500 (for 2025), plus a $7,500 catch-up contribution if they are 50 or older. The salary deferrals can be made as either pre-tax or Roth (after tax) contributions. In addition to salary deferrals, business owners can make profit sharing contributions enabling them to contribute up to a total of $70,000 in annual contributions (for 2025), plus the additional $7,500 catch-up contribution. An employer will need to file an annual information return when the plan reaches $250,000 in assets or when the plan is terminated.
Solo 401(k)s offer a variety of investment options, including mutual funds, index funds, exchange-traded funds (ETFs), stocks, bonds, and certificates of deposit (CDs). Contributions to a traditional solo 401(k) plan are tax deductible and you can also rollover funds from a 401(k) into an annuity if your plan allows it. Additionally, contributions to a Roth Solo 401(k) grow tax-free, making them a good option for a savings incentive match plan for employees.
Mandatory Withdrawals
According to IRS guidelines, you generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
Create Your Small Business Retirement Plan Today
Learn more about how these three retirement plans for small business can work for your small business here. As a custodian specializing in alternative investment options, Mainstar Trust offers various types of retirement solutions for you and your entire team. Our team of experts are ready to speak to you about retirement plan options and the practical functionality of plan administration. Contact us today to learn more!