Retirement Plans for Small Business Owners: How to Choose the Right One

Most business owners treat their retirement plan like an afterthought. They open whatever account their bank or brokerage put in front of them, set up a small automatic contribution, and never think about it again. It works, technically. But it usually means leaving a pile of tax savings and retirement money on the table every single year.

Here is what most owners never get told: a retirement plan is one of the easiest tax-saving levers you have. Almost every other tax strategy asks you to spend money to save money. Buy the equipment, hire the family member, pay for the benefit. A retirement plan is different. The money does not leave your world. It moves from your business into your own retirement account, grows for decades, and hands you a tax deduction on the way in.

The catch is that how much you can put away, and how much tax you save doing it, is not the same for every owner. It comes down to four things: how much your business earns, what entity you operate as, the salary you pay yourself, and whether you have employees. Two owners pulling the exact same profit can have wildly different contribution ceilings depending on how those four factors line up.

That is where this guide comes in. We are going to walk through the five main retirement plans a business owner can use, from the simple Roth IRA all the way up to the Defined Benefit plan that can shelter hundreds of thousands of dollars a year. We will show you how to choose the right one for where your business is today, how your entity and your salary quietly set your ceiling, and the most common mistakes that leave owners contributing a fraction of what they could.

By the end, you will know which plan fits your business right now, and you will have a real sense of how much you could actually be putting away. For most owners, that number is a lot higher than anyone ever told them.

What retirement plans can a small business owner use?

What retirement plans can a small business owner use?
A small business owner can use any of five main retirement plans: a Solo 401(k) for owners with no employees other than a spouse, a SEP IRA for simple employer-funded contributions, a SIMPLE IRA for businesses with employees who want a low-cost plan, a traditional or Roth IRA for the smallest savers, and a Defined Benefit or Cash Balance plan for high earners who want to shelter the largest amounts. The best choice depends on income, entity type, the salary the owner pays themselves, and the number of employees.

We just called a retirement plan one of the easiest tax levers you can pull. How hard you actually get to pull it depends on four factors: business income, entity structure, owner salary, and employees.

The range of options runs from the simple Traditional or Roth IRA that anyone can open in an afternoon to the complex defined benefit plan that needs a third-party administrator to run.

Start with your income. The amount of profit your business generates is a good starting point for which plan to look at. There is no minimum income a business has to hit before a retirement plan makes sense. What matters more is cash flow.

Say your business generates $10,000 in net profit. That is a fine amount to fund a Traditional or Roth IRA, or even to start a Solo 401(k). If you can put $7,500 into a Traditional IRA, it probably makes sense to do it. But if you need that same $10,000 to cover your mortgage, your groceries, and the rest of your personal expenses, then it does not make sense to lock those dollars away, no matter the tax savings.

The same logic holds at the other extreme. If your business throws off $200,000 a year but you need every bit of it to pay your bills, you are not going to want to stash that cash in a retirement plan either, no matter how good the deduction looks on paper.

Income still gives you a good indication of where to start. A business with $10,000 in net profit should stay on the simpler, low-fee end, a Traditional or Roth IRA. You could technically open a Solo 401(k) at that level, but it is probably too early. And you definitely want to stay away from the heavier plans like a SIMPLE IRA or a defined benefit plan until the income is there to support them.

There is no harm in meeting your business where it is and growing your retirement plan as your business grows. You can start with a Traditional IRA today, have a killer year, and upgrade to a Solo 401(k) next year.

Your entity structure has a smaller effect, but it still matters. It does not matter whether you are a sole proprietor, an LLC taxed as a disregarded entity, an S-corp, or a C-corp. Every retirement plan can work with every structure. What the entity changes is how much you can contribute.

Take a Solo 401(k). An LLC taxed as a disregarded entity and an LLC taxed as an S-corp land at very different contribution limits for the same plan. The disregarded entity uses a formula based on net profit, which you often do not know until tax time. The S-corp’s formula is based on the W-2 salary the owner pays themselves.

That salary is the next factor. Once the owner draws an actual W-2 salary, the contribution formulas use that figure instead of net profit. And if the owner sets that salary too low, usually to save on payroll tax (internal link: reasonable comp mistakes), they can quietly cap how much they are allowed to put into the retirement plan. Getting the entity and salary combination right is one of the biggest levers in maximizing both your contributions and your tax savings.

The last factor is employees. Once your business has employees beyond you and your spouse, it changes which plans you can use. Bring on a regular employee and the Solo 401(k) is off the table. You move up to a traditional 401(k), which costs more and takes more work to run. Most owners also do not want to use a SEP IRA once they have a team, because of the way it funds employee accounts (more on that below).

All of these factors can change from year to year, and that is fine. Your retirement plan can change right along with them. The only thing to watch is switching plans too often, because each move carries cost and paperwork. But there is nothing wrong with your plan growing as you grow.

A business owner who starts with a Traditional IRA, upgrades to a Solo 401(k) once the profit is there, and eventually adds a defined benefit plan once the business has really taken off is not being indecisive. They are making smart, necessary adjustments to keep their retirement plan in step with the business.

The five retirement plans every business owner should know

What are the main retirement plan options for the self-employed?
The five main options are the Solo 401(k), the SEP IRA, the SIMPLE IRA, the traditional or Roth IRA, and the Defined Benefit or Cash Balance plan. They run from simplest and smallest (the IRA) to most complex and largest (the Defined Benefit plan). For most solo owners and high earners, the Solo 401(k) is the workhorse. For owners who have maxed a Solo 401(k) and want to shelter more, a Cash Balance plan stacked on top is the next step.

The five plans below run in a rough ladder, from the simplest and smallest to the most complex and largest. Most owners start near the bottom and climb as the business grows. Here is each one, who it fits, and what it lets you put away.

Traditional and Roth IRA

The first place to start with a retirement plan is a Traditional or Roth IRA. Both have a max contribution limit of $7,500 if you are under 50, and $8,600 if you are over 50, for 2026.

There are income limitations on both that determine whether and how much you can contribute.

For a Traditional IRA, there is no income limitation on being able to contribute. You can always make the max contribution up to your earned income. For example, if you earned $6,000 this year (all earned income, not just business) then you can contribute a max of $6,000. The income limitation on a Traditional IRA is about the ability to deduct the contribution. Traditional IRAs are pre-tax vehicles, so if you contribute $7,500, you want to deduct that $7,500 from your income. That is how you get the tax savings. If you are above the income limitations, you can still make the $7,500 contribution, but it would not be deductible, and you could later pull those contributions back out tax-free.

A Roth IRA is different. Roth IRAs have very specific income limitations based on your filing status. It is always smart to check those limits before contributing (external link: IRS income limitations table), because unwinding excess contributions can be difficult, messy, and expensive. Roth IRAs are after-tax accounts, so you do not get a tax benefit this year, but the money is invested, grows tax-free, and comes out tax-free in retirement.

IRAs are great starting vehicles because anyone can set one up. All you need is a custodian, and most of them offer it. Vanguard, Schwab, and Fidelity will all open an IRA for you for free.

If you are a solo shop just getting going and need somewhere to begin, this is it.

Solo 401(k)

The Solo 401(k) is the next step up when you want to put more toward retirement and capture more tax savings. Solo 401(k)s are great because the contribution limit is much higher, $72,000. If you are over 50 you can make an additional contribution of $8,000. If you are between the ages of 60 and 63, you can add another $3,250 a year for a grand total of $83,250.

These max limits are a combination of employee and employer contributions. If you are running a Solo 401(k), you are both the employee and the employer, no matter your entity structure. In 2026, the employee can contribute up to $24,500, plus an additional $8,000 if over 50, and another $3,250 if between 60 and 63. The rest of the room is on the employer side.

Now that we have set the max, there are other factors that can limit how much you actually get to contribute.

For the employee portion, you can contribute up to the limits above or your self-employment compensation, whichever is less. If your business only made $20,000 in self-employment income, you can contribute up to $20,000 to the employee portion of your Solo 401(k).

For the employer portion, it is limited to a formula based on net self-employment income, which we walk through in the next section.

To start a Solo 401(k), most major custodians (Vanguard, Fidelity, Schwab) can open one for you. They all have basic, generic plan documents that let you get the plan going. If you want a more customized Solo 401(k), you can buy plan documents from a third-party provider like mySolo401k or Retirement Plan Consultants.

A Solo 401(k) will not work if you have employees. The only person you can have on the plan besides yourself is a spouse. If you have employees outside of you two, you can no longer contribute to a Solo 401(k) and need to upgrade to a different plan.

SEP IRA

The SEP IRA is a retirement plan that sits between a Traditional IRA and a Solo 401(k).

The SEP IRA is best known for its simplicity in setup and maintenance. That said, now that opening a Solo 401(k) is so easy, there is little difference in setup between the two anymore.

The SEP IRA is an employer-based plan, so it can only be funded with employer contributions, no employee contributions. It can also be used if you have employees outside of you and your spouse. There is a caveat to having employees, which we will get to in a second.

The contribution limits are similar to the employer portion of a Solo 401(k). It follows the same formula for funding with net income from self-employment. The downside is that there is no employee portion, so you cannot contribute that first $24,500 without invoking the formula. That means a Solo 401(k) lets you reach the same contribution at a lower income than a SEP, because the SEP has no employee deferral to lean on.

The biggest drawback to a SEP IRA is what you owe your employees’ accounts. You have to set up a SEP IRA for each eligible employee and fund it at the same percentage you fund your own. For example, if you contribute 10% of your salary to your own SEP IRA, the business must contribute 10% of each eligible employee’s salary to theirs. That is not an employee deferral like a 401(k) contribution. It is a direct expense to the business, because SEP IRAs are employer-only contributions.

SIMPLE IRA

The SIMPLE IRA is a good option if you have employees but are not ready to commit to a regular 401(k).

The biggest benefit of a SIMPLE IRA versus a regular 401(k) is that it is easy to set up and low-cost. Both matter, because a regular 401(k) can get expensive very quickly.

The SIMPLE IRA has a contribution max of $17,000 for 2026, with an additional $4,000 if you are over 50, and an additional $1,250 if you are between 60 and 63.

With a SIMPLE IRA, the business must match employee contributions up to 3%, or contribute 2% automatically for every employee. It is a good way to set up a retirement plan, reward your team, and still let everyone make their own contributions.

The limits are lower than a regular 401(k), and SIMPLE IRAs carry a unique penalty: 25% if you withdraw in the first two years.

Defined Benefit and Cash Balance plans

Once a business owner is maxing out their 401(k) (both employee and employer), it is time to consider a defined benefit or cash balance plan. These plans sit on top of your current retirement plan and allow for significantly higher contribution limits.

The big benefit is the ability to contribute $100,000 to $300,000 or more a year. That shelters a ton of extra cash flow and produces serious tax savings.

The downside is that these plans are not easy to set up. They require a third-party actuary, who determines the contributions based on age, salary, and investment returns. The plan has to be tested every year to make sure it is still in line with its goals and performing as expected. That extra cost and complexity is why these come last on the ladder, and why they work best stacked on top of an already maxed-out 401(k).

How much can you actually contribute? (it depends on your entity and your salary)

How much can a small business owner contribute to a retirement plan?
It depends on your entity and the salary you pay yourself. The employer contribution to a Solo 401(k) or SEP is based on "compensation," and for an S-corp owner, compensation means your W-2 wages, not your distributions. Set a low salary to save on payroll tax and you also cap your retirement contribution. For a sole proprietor or partnership, the contribution is based on net self-employment income. The plan sets a ceiling, but your entity and your pay decide how much of that ceiling you can actually reach.

Your entity structure is the first test when you calculate how much you can contribute to a retirement plan. That is because your entity determines what counts as the owner’s “compensation,” and compensation is the number every contribution formula runs on.

For an entity such as a sole proprietor, an LLC taxed as a disregarded entity, or an LLC taxed as a partnership, the owner’s compensation is the net income from the business.

The formula works in two steps:

1. Net profit minus one-half of your self-employment tax. This gives your adjusted net earnings.
2. Adjusted net earnings divided by 1.25. This gives the compensation figure the plan uses.

As you can see, it is hard to know these numbers before your tax return is prepared, which is why many business owners wait until they have a draft return in hand before making the contribution. The catch is that you spend the whole year with that money sitting out of the market, which can cost you real growth.

For a corporation (S-corp or C-corp), the owner draws a salary and receives a W-2. That salary is the number the retirement plan calculation uses (internal link: s-corp reasonable comp), and this is where it gets interesting.

Say you are an S-corp owner with a $100,000 salary. You can contribute $24,500 as the employee and $25,000 ($100,000 x 25%) as the employer, for a total of $49,500. But if you wanted to max out the full $72,000, you would need a salary of $190,000.

That is the part most owners never connect. Your salary is not just a payroll-tax decision. It is the dial that sets your retirement ceiling. This is exactly why chasing the lowest possible reasonable compensation can backfire. When we worked with the Whitmores (internal link: case study), we set a defensible reasonable compensation for James and his wife, and then deliberately raised his salary to $186,000 so he could max out his Solo 401(k) for that year. The extra salary cost a little in payroll tax. It unlocked a far larger retirement contribution and the tax deduction that came with it.

And if your spouse works in or owns part of the business, the same logic opens a second door. Putting them on payroll can start a retirement plan for them too, increasing your household’s total contributions and tax savings (internal link: hiring family members).

Want to know the salary and plan combination that lets you contribute the most? Book a 30-minute discovery call

Plan stacking: how high earners shelter the biggest numbers

Can you have more than one retirement plan as a business owner?
Yes. A business owner can run a Solo 401(k) and a Cash Balance plan at the same time, and stacking them is how high earners shelter the largest amounts. The Solo 401(k) captures the first tier of contributions, and the Cash Balance plan layers a much larger, age-based contribution on top. Combined, an older high-income owner can shelter several hundred thousand dollars a year. The trade-off is cost, complexity, and a funding commitment, so stacking only makes sense at high, stable income.

If your business is throwing off serious, consistent profit, it is probably time to think about stacking your retirement plans.

Stacking means running two plans at once. A Solo 401(k) (or a regular 401(k)) captures the first tier of contributions, and a defined benefit or cash balance plan layers a second, much larger contribution on top. For an older high earner, the combination can shelter several hundred thousand dollars a year, far beyond what any single plan allows on its own. That is a huge amount of cash flow moved into tax-advantaged accounts, with a deduction to match.

Two things need to be true before you stack.

First, consistent profit. A defined benefit plan is a pension plan that goes through annual testing, which means contributions are required every year. Once you commit, it is difficult to unwind. You do not want that kind of commitment riding on a business with wildly swinging income. Steady, year-over-year profit is what makes it work.

Second, cash flow. Profit on paper is not the same as cash in hand. If you are pulling all the extra profit out of the business to cover personal expenses, you will not have the cash to fund a big plan. But if that extra cash is piling up in your retained earnings with no job to do, a defined benefit plan can be a great place to shelter it and capture the tax savings.

And only stack once you are already maxing out another plan, usually a 401(k). A 401(k) is cheaper and easier to set up and manage than a defined benefit plan, so you want to wring out that contribution first before you take on the extra cost and complexity.

How to choose the right plan

How do I choose the best retirement plan for my business?
Choose based on four factors: your income, whether you have employees, how much you want to contribute, and how much complexity you will tolerate. A solo owner who wants high limits and low cost picks a Solo 401(k). An owner with a fluctuating income who wants simplicity picks a SEP IRA. A business with employees that wants a low-cost plan picks a SIMPLE IRA. A high earner who has maxed the Solo 401(k) adds a Cash Balance plan. A brand-new or low-income owner starts with a Roth IRA and upgrades later.

Two questions decide most of it: how much do you want to contribute, and do you have employees? Everything else is detail.

If you are just starting out or your income is still small, begin with a Roth or Traditional IRA. It takes ten minutes to open, costs nothing, and gets you in the game. You will outgrow it, and that is fine.

Once your business is generating real profit and you want to put away more than an IRA allows, the Solo 401(k) is the workhorse. For most solo owners, and most owners with just a spouse on payroll, this is the plan you will live in the longest. It has the highest limits of any simple plan and the most flexibility.

When you bring on employees, the math changes. A SIMPLE IRA lets you offer a real retirement benefit to a small team without the cost of a full 401(k). A SEP IRA can also work, and its flexibility is the draw, since you are not locked into contributing every year, which suits a business with a fluctuating income. The catch is that you have to fund your employees’ accounts at the same percentage as your own, which gets expensive fast as the team grows.

And when you are a high earner who has already maxed a Solo 401(k) and still has cash to shelter, you add a Cash Balance or defined benefit plan on top. That is the ceiling.

The most important thing to remember is that none of this is permanent. The right plan today is not necessarily the right plan in three years. Start where your business is, and move up the ladder as it grows.

Common mistakes business owners make with retirement plans

What retirement plan mistakes do small business owners make?
The most common mistakes are: contributing far below the ceiling because no one ran the math, setting an S-corp salary too low and capping the employer contribution, picking a SEP when a Solo 401(k) would reach the same ceiling at a lower income, forgetting that a spouse on payroll can open a second plan, and missing the plan-setup or contribution deadlines. Each one quietly costs the owner tax-deferred growth they cannot get back.

Mistake 1 — Contributing far below your ceiling

Most owners put a token amount into their retirement plan and call it good, never realizing how far below their real ceiling they are. That gap is the mistake, and it is an expensive one, because every dollar you do not contribute is a dollar that never gets to compound.

What makes it worse is that a retirement plan is one of the rare tax levers where the money stays yours. Most strategies make you send money elsewhere to earn the deduction. This one just moves it into your own account.

Make sure you have the right plan for your business and situation, then make your goal to max it out. If you have extra cash flow, it should be heading toward your retirement plan.

Mistake 2 — Setting an S-corp salary too low and capping the contribution

Most S-corp owners immediately target the lowest reasonable compensation they can justify (internal link: reasonable comp mistakes). They want to maximize their tax savings, and a low salary is a good way to do that.

The problem is that it directly affects how much you can put into your retirement plan. Once you are on payroll, the contribution limits are based on your salary, not your net income.

In 2026, you need a salary of $190,000 to max out your 401(k) at $72,000. Set your salary too low and you are quietly capping yourself. Consider raising it so your retirement plan is not the thing that pays for your payroll-tax savings.

Mistake 3 — Using a SEP when a Solo 401(k) would do more

For years, the SEP IRA was the go-to small business retirement plan. It is extremely easy and cost-effective to set up. The downside is that the income limits are worse. It takes more income to reach the same contribution you would get from a Solo 401(k), because the SEP has no employee deferral.

These days, Solo 401(k)s are just as easy and just as cheap to open. Most custodians will open one with digital paperwork and no fee.

If you are still in a SEP IRA out of habit, now is a good moment to look at moving to a Solo 401(k).

Mistake 4 — Forgetting the spouse can open a second plan

If your spouse is already doing real work in the business, do not forget that they can have a retirement plan too (internal link: hiring family members). This is even true with a Solo 401(k). The owner and the spouse are the two participants allowed on the plan, which means a married couple can run one plan covering both of them.

Skip it and you are walking past a second plan’s worth of contributions and tax savings every year.

Mistake 5 — Missing the setup or contribution deadline

The best time to set up a retirement plan was earlier this year. The second best time is before this year ends. Depending on the plan you choose, the setup and funding timelines can take a while, and a lot of plans have strict deadlines for when they have to be opened and funded to count for a given year.

For each plan, there is one deadline to establish it and a separate deadline to fund it. The type of plan and your entity structure determine both.

When in doubt, set the plan up first and figure out whether you can fully fund it later. The important part is getting the plan established before the window closes.

When to talk to a wealth-and-tax advisor

When should I talk to an advisor about a retirement plan?
The right time is before you open a plan, so the plan you choose matches your income, entity, and salary instead of whatever the brokerage app defaulted you into. It is also worth a conversation any year your income jumps, you bring on employees, or you realize you have been contributing far below your ceiling. For most owners, the retirement plan decision should be made alongside the reasonable compensation and entity decisions, because all three drive the same number: how much you can actually shelter.

Here is the trap with retirement plans: the brokerage that opens your account is not the one running your tax plan. They will happily set up whatever you ask for, but nobody on that side is asking whether your salary is set high enough to unlock the full contribution, whether your entity is helping or hurting, or whether putting your spouse on payroll would double what you can put away. Those are tax and entity questions, and they get decided long before you click “open account.”

That is the work we do. We look at your retirement plan, your reasonable compensation, and your entity as one decision, because they all drive the same number: how much you can actually shelter. Getting those three to work together is usually worth far more than picking the “perfect” account in isolation.

If any of these sound like you, it is worth a conversation:

• You are contributing to a retirement plan but have no idea if you are near your real ceiling
• You are an S-corp owner and have never connected your salary to your contribution limit
• Your income jumped this year and your old plan no longer fits
• You are a high earner who has maxed a Solo 401(k) and wants to shelter more
• You have a spouse doing real work in the business who is not on payroll
• You are bringing on employees and your current plan would force costly contributions for them

Find out how much you could actually be contributing. Book a 30-minute discovery call

Summary

The retirement plan you choose sets a ceiling. Your income, your entity, and the salary you pay yourself decide how close to that ceiling you actually get. Most owners never find out how high it really was, because no one ever ran the math for them.

Start where your business is today. A Roth IRA when you are getting going, a Solo 401(k) as the profit grows, a defined benefit plan stacked on top when you are ready to shelter the most. Move up the ladder as the business climbs, and you stop leaving years of tax-deferred growth behind.

We will go deeper in the posts to come, with a closer look at the Solo 401(k) head-to-head and the full contribution math. For now, the move is simple: find your real ceiling, and start climbing toward it.