Business owners get retirement plan options that W-2 employees never see. The contribution limits are higher (sometimes by 5x), the deduction is bigger, and the design is more flexible. Picking the right plan can be worth tens of thousands of dollars a year in tax savings.
SEP-IRA
Simplest. Open one at any brokerage in 15 minutes. Contribution: employer-only, up to 25% of W-2 wages (for an S-corp), or 20% of net self-employment income (for sole props). 2025 cap: $70,000. No salary deferral component.
Catch: contributions must be a uniform percentage of comp for ALL eligible employees. So if you put 25% away for yourself, you have to do 25% for your bookkeeper and your warehouse staff. SEP works best when it’s just you, or just you plus a spouse, or just owners.
SIMPLE-IRA
For businesses with 100 or fewer employees. Employee can defer up to $16,500 (2025) of salary. Employer matches 3% of comp (or makes a 2% non-elective contribution). Easy to administer. Catch: the contributions are modest compared to other plans.
Solo 401(k) (Individual 401(k))
For owner-only businesses (you, you and your spouse). The owner makes both the "employee" deferral ($23,500 in 2025, plus $7,500 catch-up at 50+) AND the "employer" contribution (up to 25% of comp). Combined limit: $70,000 (or $77,500 at age 50+).
The split structure makes this MUCH more powerful for owner-only businesses than a SEP. You can defer a higher dollar amount on lower comp.
Traditional 401(k) with safe harbor
When you have W-2 employees who you want to contribute and to pass nondiscrimination testing. Safe harbor contributions (typically 3% non-elective or a 4% match) replace the actual deferral percentage testing. Owner can max out the same employee + employer contributions plus the match.
Add a profit-sharing component on top, and at the upper end, you can get to the full $70K/year per participant.
Cash balance / defined benefit overlay
For high-income owners who already max a 401(k) and want to put away even more. A defined benefit or cash balance plan layered on top can take total annual contributions over $300,000 for an owner in their 50s. See the defined benefit plans article.
Picking by stage
- Sole prop, no employees, just starting: SEP-IRA is fine.
- Sole prop / S-corp owner-only with moderate income: Solo 401(k) is better.
- S-corp with 1-3 employees, want owner-heavy contributions: Safe harbor 401(k) with profit sharing.
- High earner (>$300K profit), age 45+, can put away a lot: Safe harbor 401(k) + cash balance overlay.
- 10+ employees, complex structure: Custom plan design with a TPA.
The point
The wrong plan choice can cost you a meaningful amount of tax-deferred savings. The right plan can take $40K-$70K (or more) off your taxable income every year and grow it tax-deferred until you retire. Worth getting this one right.