Retirement Plan Selection for Small Business Owners

Self-employed business owners wear many hats and juggle multiple responsibilities. 

One aspect that should not be neglected is saving for retirement through tax efficient vehicles, such as the SEP IRA, Solo 401(k), SIMPLE IRA or a defined benefit (pension) plan (the subject of a future alert).

Which plan you should choose depends on several factors, including your age, income, liquidity needs, tax benefits, employee incentives and administrative costs.

A Solo 401(k) provides a larger contribution than a SEP IRA for someone with say, $200,000 of income, since the plan allows both employee contributions and employer profit sharing. In 2018, the maximum contribution to a Solo 401(k) is $55,000 or $61,000 if age 50 or older (see chart below).

By comparison, the SEP IRA has similar annual limitations but does not allow for employee or catch-up contributions. At higher income levels, the Solo 401(k) and SEP IRA may be comparable, again depending on your age.

The SIMPLE IRA imposes additional requirements on the employer and would not likely be used unless you have employees, steady profits and a reasonable payroll. Finally, employer contributions to all such plans reduce taxable income and may enable the pass-thru business owner to take advantage of the 20% qualified business income deduction 1.


Both the Solo 401(k) and the SEP IRA can be funded by the time the tax return plus extensions must be filed. However, the Solo 401(k) must be established before the end of the year for which the contribution is being made. Clients should consult with their tax and financial advisors before taking any action.

If you are interested in learning how to take advantage of the changes in the new tax bill and set yourself up for retirement you can attend one of our FREE private briefings.

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DISCLAIMER: This memorandum was produced by Summit Financial Resources, Inc. Securities and investment advisory services are offered through Summit Equities, Inc. Member FINRA/SIPC. Financial planning services are offered through Summit Financial Resources, Inc. 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973- 285-3666. This memorandum is for your information and guidance and is not intended as legal or tax advice. Legal and/or tax counsel should be consulted before any action is taken. 20180514-457