Business owners love reducing taxes. Retirement accounts are one of the best ways to defer or reduce taxes. Almost irrespective of personal retirement plans, contributing to retirement accounts to some degree should be common for most business owners. Besides the tax benefits and the employee benefits, retirement accounts are foundational to a financial plan. After deciding to contribute to retirement accounts, the question turns to which one is best. While there are different options, understanding what fits best can help maximize the retirement plan for your situation.
Key Takeaways:
- SIMPLE IRAs may be the best for businesses prioritizing employee retention, as they are easy to set up, low-cost, and allow employees to contribute with employer matching (up to 3%); however, they have lower contribution limits than other plans.
- SEP IRAs can be ideal for businesses with few or no employees because they allow high employer-only contributions (up to 25% of income), benefiting high-earning owners, but require equal percentage contributions for all employees.
- 401(k)s may be the most flexible account option and could allow for the highest potential contributions. They support both employee and employer contributions, but usually come with higher setup and maintenance costs as well as complex compliance requirements.
SIMPLE IRA
If you want a retirement account solely for enticing and retaining employees, then the SIMPLE IRA plan may be a great option. The two main advantages of the SIMPLE IRA plan is that it is relatively easy to set up and maintain, and it allows employees to contribute themselves and receive a small matching contribution.
The setup and maintenance can be done through any number of brokerage firms. Your advisor likely should be able to set one up as easily as opening a personal IRA or brokerage account. The cost and maintenance are generally minimal and can be administered with a few forms each year.
From an employee perspective, SIMPLE IRA plans are great because they allow contributions up to $16,500 (for 2025). Employees over 50 or 60 can contribute an additional few thousand through catch-up contributions as well. SIMPLE IRA plans generally require some level of matching contributions from the employer. This is usually a dollar-for-dollar match up to 3% of the employee’s income. For employees who may only put $5,000 or $10,000 per year into a retirement account, this could be a great option. Receptionists, teachers, assistants, technicians, bookkeepers, etc., all may fit the bill nicely for this plan.
If the goal of the owner is to maximize their retirement savings and/or reduce taxes, other plans may be more suitable than this one. While $16,500 is a great starting point for contributions, looking for the maximum could be found in either a SEP IRA or 401k, where you could contribute up to 4 times more than the SIMPLE IRA allows.
SEP IRA
If the SIMPLE IRA is good for owners who primarily want to benefit their employees, the SEP IRA tries to maximize benefits for both owners and employees at the same time. SEP IRA plans have similar minimal requirements for setup, maintenance, or cost. The primary benefit of a SEP IRA is that contributions are solely employer contributions, up to 25% of compensation for each person.
Each year, the owner can set what percentage they want to contribute to their personal SEP. For owners with $200,000+ in income, that means $50,000+ can be contributed compared to the $16,500 for the Simple IRA. Now, the drawback to the extra savings is that the employees must also receive the same percentage benefit, so the “expense” of paying into the employees’ SEP IRAs must be accounted for as well. If you have an assistant who makes $100,000, then up to $25,000 must go into their SEP IRA as well, depending on what percentage you set.
This plan seems to work better with owners with zero or only a few employees. Since all the contributions are on the employer side, there is technically no way for the employee to contribute themselves. But if there are only 1-4 people in the company anyway, that may not be a large concern. If the main concern is to maximize contributions, depending on the number of employees, this is when the 401k enters the picture.
401k
For the last 50 years or so, 401k plans and other defined-contribution plans have dominated the company retirement landscape. Today, there are significantly fewer companies that offer a pension instead of a 401k. One of the main reasons is that there is more flexibility within the 401k. Starting a 401k for your company can likely give you the largest contribution possible, although it will have the highest setup and maintenance costs of the three plan options. If the Simple IRA and SEP IRA costs are negligible, a new 401k plan may run you a couple thousand dollars (or a couple hundred dollars if you have no employees).
While 401k plans cost the most, the benefit may far exceed the costs. 401k plans essentially operate as a mix of the SIMPLE IRA and SEP IRA plans. Employees are allowed to contribute up to $23,500 (in 2025), and employers usually match a standard 3%. After that, there are additional employer contributions, either through profit-sharing or after-tax contributions, which could be limited by the 25% of compensation rules.
There are many tests and restrictions for 401ks to make sure the plans do not become “top heavy”, where the owners are contributing significantly more than the employees. Therefore, there is some calculation to determine the maximum contribution. Taken to the natural extreme, owners who have no employees can potentially max out their 401k, which for 2025 is $70,000 (a little more for those over 50). $23,500 would be contributed on the “employee side” and $46,500 on the “employer side” if the owner brings home at least $186,000.
Which Plan Works for You?
There are a lot more 401k rules that I am overlooking, but the power of the 401k plan remains. 401ks are great for the maximum amount of customization and potential contributions. SEP IRAs are great if the company is relatively straightforward, since the SEP can skip many of the hoops required in the 401k. Simple IRAs may be perfect if the goal is purely to benefit employees. Ultimately, choosing the right retirement plan is about your personal and business goals. Focus on what you want first, then find the right retirement plan to fit into it.
TC Falkner 