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small business planning for retirement

Planning for Retirement as a Small Business Owner

If we asked you, as a small business owner, what your priorities are, what would you say? Our guess is you’ll probably mention things like growth, hiring new team members or keeping an eye on the economic environment. But chances are, you probably wouldn’t mentioned planning for your retirement.

Big mistake.

We’ve said before that small business owners must remember to pay themselves — but that doesn’t mean just salaries. That also means benefits: health insurance, vacation and providing for your post-career future.

So, how do you go about doing that? The following are some of the most viable options you, a small business owner, have when it comes to planning for retirement. We’ll discuss what they provide, who can contribute, and each plan’s limitations. Some plans are better for small businesses than others — and this guide will help you chose the one that’s right for you.

A Quick Note on Retirement Plans

In all of the plan options we’re about to discuss, money is allowed to grow tax-free in the account until it’s withdrawn. When money is taken out, it is taxed at the employee’s tax rates at the time of the withdrawal. Funds withdrawn at or before age 59½ are also subject to a 10% penalty.

Also, people generally must begin taking required minimum distributions (RMDs) from their plans starting at age 72 (or 73 if you reach age 72 after Dec. 31, 2022).

5 Retirement Plans for Small Business Owners

Traditional 401(k)

Most people are familiar with the traditional 401(k) — a defined contribution plan where employees contribute pretax dollars from their earned wages. Employers also can choose to partially or fully match contributions, or contribute funds regardless of whether employees put any funds into their plan.

The maximum employee contribution amount is $25,000 in 2023, and the maximum combined employee and employer contribution amount is $66,000. Workers aged 50 and older may make an additional $7,500 in catch-up contributions.

Just note that traditional 401(k)s can be prohibitively expensive to set up for small businesses, with costs including third-party administration, recordkeeping and more.

Individual (Solo) 401(k)

A solo 401(k) is similar to a traditional 401(k) in numerous ways, but it’s designed for sole proprietors with no employees, or sole proprietors and a spouse.

As a sole proprietor, you are your own employer, so the solo 401(k) allows you to contribute as both employee and employer. The $22,500 individual contribution limit applies, as does the $7,500 in catch-up contributions. From the employer side: If you’re incorporated, you can contribute up to 25% of compensation; if not, up to 20%. Either way, the maximum remains $66,000 for 2023, $73,500 if you’re 50 or older.

If a spouse earns income from a sole proprietor, they too can contribute to the solo 401(k); the business can contribute, too.

Solo 401(k)s are also generally cheaper to set up than a traditional 401(k).

SIMPLE 401(k)

The SIMPLE 401(k) (Savings Incentive Match PLan for Employees) is similar to a traditional 401(k), but a business must meet three requirements to establish a plan:

  • The business must have 100 or fewer employees who earned at least $5,000 in compensation from the employer during the previous year.
  • It must not have any other retirement plans.
  • It must file a Form 5500 every year.

(Note: There’s a two-year grace period allowing companies to continue with the SIMPLE 401(k) plan once they’ve exceeded 100 employees.)

Employer matches are also governed more tightly. Within a SIMPLE 401(k), an employer must make a non-elective contribution of 2% of each eligible employee’s pay, or a matching contribution of up to 3% of each employee’s pay.

The employee contribution limit is $15,500 in 2023, with a $3,500 catch-up allowance for those age 50 and older.

Like with traditional 401(k) plans, however, administrative costs can be high.


With a SIMPLE IRA, the employer sets up traditional IRAs for employees, and both employee and employer can contribute. It has similar restrictions and requirements (number of employees, no other retirement plans, employer contribution rules), and the same employee contribution limits apply.

A couple of noteworthy differences? For one, SIMPLE IRAs have no minimum age requirement for employees, while you must be 21 years old to participate in a SIMPLE 401(k). Also, employees can’t take loans out against SIMPLE IRAs, whereas SIMPLE 401(k)s permit them.

These plans also tend to be cheaper to establish than a traditional retirement plan.


Like with a SIMPLE IRA, SEP IRAs are a relatively cheap and simple way to start a retirement plan for a company’s employees. But there are considerable differences.

Chief among them: Employees do not contribute. Employers, however, may contribute up to 25% of an employee’s pay each year. Contribution maximums are $66,000 for 2023. Catch-up contributions do not apply.

Also, there is no employee minimum or maximum. Businesses of any size, including self-employed individuals, may establish SEP plans.

Plan for Your (And Your Employees’) Retirement

Not sure what direction to go in, or want help setting up a plan?

McManamon & Co. serves small- and midsize businesses in many ways, including offering a broad spectrum of consulting services that fortify our clients’ businesses and keep them operating on the highest level. That includes helping business owners determine how to provide for themselves and their employees’ future.

Find out more about what we can do for you. Call us at 440.892.8900 or contact us online today.

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