Business owners have a wide range of options to navigate when it comes to choosing the right retirement plan vehicle for their business. Choosing the “best” plan depends on who you are and how your business is structured.
Plan Objectives
- Maximize your own contributions (especially in high income years)
- Offer a competitive benefit to retain talented employees
- Keep administration simple and predictable
Prioritizing which of these objectives matters the most to you is a good place to start when determining what type of plan is the best fit.
Common Options
Solo 401(k)
Best for owners with no eligible employees (other than a spouse). It’s efficient, flexible, and often allows higher contributions than a SEP in certain income ranges. If you’re a true owner-operator today but might hire later, a Solo 401(k) can be a strong starting point.
SEP IRA
Simple to set up and easy to administer. A SEP can work well for a solo owner or a small team, but contributions are typically proportional across eligible employees. If your goal is to maximize owner savings while keeping employee contributions low, a SEP may be less ideal once you have staff.
SIMPLE IRA
Often a good fit for small businesses that want to start offering a benefit without heavy complexity. You’ll generally make a required match or contribution, but the administrative burden is light. It can be a “starter plan” that evolves into a 401(k) as the business grows.
Traditional 401(k)
The most flexible option once you have employees. A 401(k) allows employee deferrals and can be paired with employer matching, profit sharing, and eligibility design (within rules) to align incentives and retention. While it requires more administration, it’s often the best long-term platform for a growing company.
Cash Balance Plan (often paired with a 401(k))
This is where things get interesting for higher-income owners. Cash balance plans can allow very large tax-deferred contributions—especially for owners who are older or want to accelerate savings—while still providing a structured benefit to employees. They are more complex and require consistent contributions, so they fit best for stable, profitable businesses.
Considerations
1) Do you have employees, and what does “fair” look like for your team?
Many plans require comparable benefits for eligible employees. The more staff you have, the more important plan design becomes.
2) Is cash flow stable enough to commit?
Plans like cash balance generally work best when your profitability is steady and predictable.
3) Are you trying to save more than a standard plan allows?
If you’re already maximizing typical options, it may be time to explore a 401(k) with profit sharing or a cash balance plan.
Next Steps
If you’re considering a change or looking for help to get started, contact a Rockbridge advisor today.