Choosing the Best Retirement Plan for Your Business to Maximize Tax Savings
- P. David Johnson, CPA
- May 11
- 5 min read
Selecting the right retirement plan for your business can have a significant impact on your tax savings and the financial security of your employees. With several options available, understanding which plan fits your business size, goals, and budget is essential. This guide breaks down key retirement plans, highlights their tax advantages, and helps you make an informed decision that benefits both your business and your team.
Understanding Your Retirement Plan Options
Small and medium-sized businesses have three common options when choosing a retirement plan: SEP IRA, SIMPLE IRA, and 401(k). Each plan offers different benefits, contribution limits, and tax advantages.
SEP IRA Plans
Simplified Employee Pension (SEP) IRAs are designed for small businesses and self-employed individuals. They are easy to set up and maintain, with flexible contribution amounts.
Contribution limits: Employers can contribute up to 25% of an employee’s compensation, with a maximum of $72,000 (2026 limit).
Employer contributions only: Employees do not contribute directly.
Tax benefits: Employer contributions are tax-deductible, lowering business taxable income. Employees can also elect for taxable Roth contributions to realize tax free growth.
Reporting: No annual employer filings are required.
RMDs: Because the plan is an IRA, plan balances will be subject to Required Minimum Distributions once you reach the mandatory age (currently age 73) regardless of whether you are still working.
Best for: Businesses with variable income or fewer employees.
SIMPLE IRA Plans
Savings Incentive Match Plan for Employees (SIMPLE) IRAs are another option for small businesses with fewer than 100 employees. They are less complex than 401(k) plans but still offer tax advantages.
Contribution limits: Employees can contribute up to $17,000 annually (2026 limit), with a $4,000 catch-up for those over 50.
Employer contributions: Employers must either match employee contributions dollar-for-dollar up to 3% of compensation or contribute 2% of compensation for all eligible employees.
Tax benefits: Contributions reduce taxable income for both parties.
Reporting: No annual employer filings are required.
RMDs: Because the plan is an IRA, plan balances will be subject to Required Minimum Distributions once you reach the mandatory age (currently age 73) regardless of whether you are still working.
Best for: Small businesses wanting a straightforward plan with lower administrative costs.
401(k) Plans
A 401(k) plan is a popular choice for businesses that want to offer employees a way to save for retirement with tax advantages. Employees can contribute pre-tax dollars, reducing their taxable income. Employers can also make matching contributions, which are tax-deductible for the business.
Contribution limits: Employees can contribute up to $24,500 annually (2026 limit), with an additional $8,000 catch-up contribution if over 50.
Employer contributions: Employers can match contributions or make profit-sharing contributions.
Tax benefits: This type of plan allows both employer and employee contributions to be tax-deferred, meaning taxes are paid when funds are withdrawn in retirement. This can lead to significant tax savings now. Employees can also elect to make non-deductible Roth contributions to realize tax free growth.
Reporting: Employers must file form 5500 unless a Solo 401(k) with less than $250,000 in plan assets.
RMDs: Plan participants do not have to take Required Minimum Distributions as long as they are still working.
Best for: Businesses with steady cash flow and multiple employees.
Plan Type | Maximum number of employees | Employee Contribution Limit (2026) | Employer Contribution Limit (2026) | Overall Maximum Contribution (2026) | Annual Reporting | RMDs |
SEP IRA | Any | No employee contributions allowed | 25% of compensation or $72,000 | 25% of compensation or $72,000 | None | Must begin taking distributions at mandatory RMD age |
SIMPLE IRA | 100 | $17,000 ($21,000 over age 50) | If employer matching, 3% of compensation or $17,000 ($21,000 over age 50); If 2% nonelective, $7,200 | $34,000 ($42,000 over age 50) | None | Must begin taking distributions at mandatory RMD age |
401(k) | Any | $24,500 ($32,500 over age 50) | 25% of compensation or $47,500 | $72,000 ($80,000 over age 50) | Form 5500 | Can defer taking distributions as long as still working |
Solo 401(k) | 1 | $24,500 ($32,500 over age 50) | 25% of self-employed income or $47,500 | $72,000 ($80,000 over age 50) | None if plan assets under $250,000 | Can defer taking distributions as long as still working |
Example Scenario 1
Imagine a business with four employees (under age 50) earning $80,000 each. Choosing a SEP IRA, the owner could contribute up to 25% of each employee’s salary, or $20,000 per employee, totaling $80,000 in contributions. This amount is deductible, reducing the business’s taxable income by $80,000.
If the employer set up a SIMPLE IRA with 2% nonelective deferrals, employees could defer up to $17,000 each, but the employer would only contribute $6,400.
If the employer set up a SIMPLE IRA with matching deferrals up to 3%, employer contributions would be dependent on the employees’ deferral elections. Employer contributions could only be up to $9,600.
With a 401(k) plan, employees could contribute up to $24,500, and the employer would make matching contributions up to the rate established by the plan. The employer would also have the flexibility to make profit sharing contributions after year-end to reduce the business tax liability. The business can contribute up to $80,000 on top of the employee contributions.
Example Scenario 2
Imagine a solo entrepreneur who is 55 years old earning $250,000 in self-employment income. Choosing a SEP IRA, the owner could contribute up to $50,000. This amount is deductible, reducing the business’s taxable income to $200,000.
By contrast, a Solo 401(k) plan would allow the owner to make $24,500 in elective deferrals, $8,000 in catch-up contributions, and another $47,500 in employer contributions. Taxable income with this type of plan could be reduced to $170,000.
Factors to Consider When Choosing a Retirement Plan
Several factors influence which retirement plan fits your business best:
Number of employees: Larger businesses often benefit from 401(k) plans, while smaller businesses may prefer SEP or SIMPLE IRAs.
Administrative complexity: 401(k) plans require more paperwork and compliance, while SEP and SIMPLE IRAs are easier to manage.
Contribution flexibility: SEP IRAs offer the greatest employer flexibility to increase or decrease contributions. SIMPLE IRAs have either a fixed rate or matching dependent on employee elections. 401(k) plans generally have a fixed matching rate, but employers have greater flexibility in making profit sharing contributions.
Cost: 401(k) plans typically have higher setup and maintenance costs.
Employee attraction and retention: 401(k) plans offer more employee flexibility in deferral elections. They also encourage employee contributions, which can improve retention and satisfaction.
Steps to Implement Your Retirement Plan
Once you decide on a plan, follow these steps to implement it effectively:
Consult a tax professional or a plan advisor to understand the tax implications and compliance requirements.
Choose a plan provider that offers the services and support your business needs.
Communicate the plan to your employees clearly, highlighting benefits and enrollment procedures.
Set up payroll deductions for employee contributions if applicable.
Monitor and review the plan annually to ensure it continues to meet your business and employee needs.
Final Thoughts
Choosing the best retirement plan for your business requires balancing tax benefits, administrative ease, and employee needs. Whether you select a 401(k), SEP IRA, or SIMPLE IRA, the right plan can reduce your tax burden and support your team’s financial future. We can help you understand what plan type is right for your business, and we can connect you with a plan advisor. Email jessica@fpgtax.com or call our office at (816) 941-2900 if you’d like to discuss this topic with one of our firm’s professionals.
Comments