Your guide to small business retirement plans

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Find a plan that works for you and your employees.

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Offering a retirement plan can help you attract and retain employees, and give you a way to build for your own retirement savings. Depending on the size of your business and your state’s requirements, you may not be required to offer one, but doing so can show employees they’re valued and give you a tax-advantaged way to build your nest egg.

There are several small business retirement plans to consider, and each has its own rules, contribution limits, and setup requirements. The right fit will depend on your goals, your headcount, and how much administration you’re willing to take on.

The Simplified Employee Pension (SEP) IRA lets business owners contribute as much as 25% of compensation or $69,000 (for 2024) and $70,000 (for 2025), whichever is less. With its high contribution limits, a SEP IRA is one of the most effective options for growing your nest egg.

Setting up a SEP IRA is fairly straightforward:

There are a few rules to keep in mind with the SEP IRA. You must contribute the same percentage to your employees’ plans as you do your own. But your percentage is based on your business’s modified net income, while your employees’ percentages are based on their salaries. You’re also required to contribute to your employees’ accounts in any year that you contribute to your own. Annual contributions must also be reported on IRS Form 5498.

For example: Suppose you decide to contribute 10% on behalf of your employees toward each of their SEP IRAs. Joe’s income is $80,000, so your employer contribution to his account is $8,000. Mary’s income is $85,000, so your contribution to her account is $8,500. Your contribution to your own SEP IRA, as owner, is 10% of the business’s net income (after deducting one-half of your self-employment tax and contributions to your own SEP),not your salary. Note that employees cannot make their own contributions to the SEP IRA you set up for them; the business owner is the only one who contributes.

The traditional SEP includes pre-tax contributions and required minimum distributions (RMDs) starting at age 73. There’s also a Roth option that uses after-tax contributions, grows tax free, and can be withdrawn tax free after age 59½.

Another choice for small businesses is the SIMPLE IRA. This plan is designed to be relatively easy to administer. It’s typically available only to businesses with 100 or fewer employees. Like the SEP IRA, there are just three steps to get started:

The SECURE ACT 2.0 introduced a Roth version for the SIMPLE IRA.

Each year, you can choose to match your employees’ contributions dollar for dollar up to 3% of their pay, or chip in an amount equal to 2% of their wages without requiring them to contribute.

Annual contribution limits for a SIMPLE IRA are lower than those for a SEP IRA, at $16,000 in 2024 and $16,500 in 2025, with a $3,500 catch-up contribution for those over age 50 in both years. The 3% matching contribution can be reduced as low as 1%, but only for two out of five years.

The 401(k) is one of the first accounts that comes to mind when many people think of employer-sponsored retirement plans. It, too, comes in traditional (i.e., tax deferred) and Roth varieties. But it can be costly to establish a 401(k) plan as a small business owner, and some might find this retirement plan difficult to administer, as you’re required to:

A traditional 401(k) requires annual testing to make sure the benefits to regular employees are proportional to those of the owners. If you as a business owner draw a salary much higher than your employees’ salaries, you might not be able to pass this nondiscrimination testing.

A safe harbor 401(k) avoids the nondiscrimination testing by requiring certain matching percentages that are immediately fully vested by employees.

In general, the 401(k) reporting and administration requirements can be onerous or costly. For small business owners, it might make more sense to stick with something else.

If you don’t have any employees, you could consider opening a solo 401(k). Some brokers offer these accounts and can help you set up and administer one. You as the business owner act as both employer and employee in calculating your contributions.

For 2024, total contributions are capped at $69,000 or $76,500 for workers age 50 and older. In 2025, the limits increase to $70,000 and $77,500 for workers age 50 to 59 and those 64 and older. New for 2025 is an enhanced catch-up contribution that lets those age 60 to 63 set aside up to $81,250.

These limits combine contributions made as both the employee and employer:

Employee contributions

Employer contributions

The employer contribution limit (25% of compensation) may seem high, but it ensures flexibility for lower earners. Still, your total contributions as both an employee and employer must stay within the annual limits based on your age and income.

Note: If you hire any employees who aren’t your spouse, you can no longer contribute to a solo 401(k) plan.

You can also set up a profit-sharing plan, which lets you contribute discretionary amounts to your employees’ retirement accounts based on how well your business does. In 2024, you can contribute up to $67,000 for each employee, and in 2025, that limit increases to $68,000. Typically you put a pool of profits into an account and split the profits among the employees based on their salaries. There’s no limit on the size of businesses eligible to use a profit-sharing plan, and you can offer another type of retirement plan as well. But you must file an annual Form 5500 and perform benefits testing to ensure that highly compensated employees don’t get favorable treatment under the plan. The cost of administering a profit-sharing plan might be higher than using a SEP or SIMPLE IRA.

Small business retirement plans help you save for your own future while offering a meaningful benefit to your employees. Tax credits can offset the cost of setting up a plan, and the contributions you make on behalf of your workers are tax deductible.

Employees are often the backbone of a growing small business and can feel like part of your family. A retirement plan can keep them motivated and engaged. To keep things as simple as possible, weigh your options before deciding what to offer.