What Is the Best Retirement Plan for a Small Business?

If you own your own business, you may wonder how to find good retirement plans for small business owners. After all, you don’t get a 401(k) or other retirement account from an employer. Instead, you’re responsible for ensuring your own financial security in retirement. And of course, if you have employees, you probably want to help them save for retirement, too. Fortunately, there are a number of retirement plans for small business owners available, and it’s not hard to set them up and build a more secure future.

Do You Need a Small Business Retirement Plan?

The short answer is yes. It’s important to have a small business retirement plan  in place for your future. And it’s also important to help any employees you may have plan for their retirement, as well. That can help your business in the long run.

employees consider their retirement plans one of the most important benefit at work. Source: 8th Annual Survey of Retirement Plan Participants, American Century Investments, 2020.

Just under half of small businesses in the U.S. offer a retirement account to their employees, according to the U.S. Bureau of Labor Statistics . And offering this option may help you recruit and retain employees. In fact, our 8th Annual Survey of Retirement Plan Participants  found that nine out of 10 employees consider their retirement plans to be among their most important benefits at work.

What Retirement Plans Are Available for Small Business Owners?

There are a number of small business retirement plans available. But in particular, SEP and SIMPLE IRAs both offer tax-deferred growth and less paperwork than some other retirement options. That’s why they’re both retirement plan choices for small businesses.


SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account.

SEP IRA stands for Simplified Employee Pension Individual Retirement Account.

While the SIMPLE IRA and the SEP IRA both provide ways for you and your employees to save and invest money for retirement, several factors will influence if one is right for you. Below, we’ll explain some key factors to consider as you choose the best retirement plan for your small business.

How Big Is Your Business?

SIMPLE IRAs can be set up by any employer with up to 100 employees earning more than $5,000 per year. If your business has more employees, you’ll have to opt for a different kind of plan.

A SEP IRA can be used by any size of business, including self-employed people who have no employees at all.

Who Will Make the Contributions?

A key provision of small business retirement accounts is who is actually providing the money that’s going into them. Here, there are significant differences between the two types of account.

A SEP IRA differs from a traditional 401(k) in that employees don’t contribute to a SEP account themselves. The employer makes the contributions and, generally, must make contributions at the same percentage of salary for every employee.

The owner of the business can also make contributions to his or her own account, but they’re subject to the same contribution limits and, generally, must be made at the same percentage as contributions made to the employees’ SEP IRAs. 

Who Contributes?

With a SEP IRA, only the employer contributes to plan and it must be the same percentage for each employee.

For SIMPLE IRAs, the employer and employee both contribute. Employers can also match contributions.

Employers can choose when they want to make SEP IRA contributions, and they’re not required to contribute every year. For instance, if your business has a rough year and you need to tighten the purse strings, you could skip contributions that year. You could also be more generous with contributions during a profitable year. However, SEP IRA contributions provide a tax deduction for your business, either for the amount of your contributions or 25 percent of your employee’s compensation, whichever is less. So not contributing for a year means you don’t get that deduction in that year.

The SIMPLE IRA is somewhat different. As with a 401(k), contributions can come from both the employee and the employer. But with a SIMPLE IRA, the employer is actually required to contribute. As an employer, you can either match the employee contributions dollar for dollar up to three percent, or you can give all your employees a contribution equal to the same percentage of their salaries, whether or not the employees contribute.

Bear in mind that, unlike a SEP IRA, a SIMPLE IRA doesn’t allow employers to skip a year of contributions. However, all of the employer’s contributions are tax deductible.

How Much Money Can Be Contributed?

For a SEP account, an employer can contribute up to 25 percent of each employee’s salary pre-tax (or up to $58,000 in 2021, whichever is less) and must make contributions at the same percentage of salary for every employee.

Employees and owners are both also able to contribute to a traditional or Roth IRA, but contributions to a SEP IRA reduce the amount they can contribute to those other plans.  

For SIMPLE IRAs, how much can be contributed can vary from year to year. In 2021, the annual contribution limit to a SIMPLE IRA is $13,500. Workers over age 50 are eligible to make an additional catch-up contribution of up to $3,000 for a total of $16,500. (SEP IRAs do have higher contribution limits but don’t allow for catch-up contributions.)

With a SIMPLE IRA, employees can also contribute to a Roth or traditional IRA subject to income and contribution limits.  

Contribution Limits

SEP IRA - Employers can contribute up to 25% of each employee’s salary (or up to $58,000, whichever is less) in 2021.

SIMPLE IRA – For 2021, the limit is $13,500. Employees over age 50 can make an additional $3,000 in contributions. 

When Are the Deadlines?

Finally, it’s important to know by when you need to set up your accounts.

The deadline for setting up a SEP IRA is the business’s tax deadline plus any extensions.

A SIMPLE IRA must be established by October 1 of the year the plan becomes effective.

Next Steps

As you contemplate which kind of small business retirement plan might work best for you (and your employees), you’ll want to consider factors like whether or not you want to commit to making regular contributions to your employee’s accounts and what kind of contribution limits you’re most comfortable with. 


Call us to discuss whether a SEP IRA or SIMPLE IRA might be right for your business’s retirement needs.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½. If withdrawals are made within the first two years of participation in the SIMPLE IRA, the penalty increases to 25%.

You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

This information is for educational purposes only and is not intended as a personalized recommendation or fiduciary advice. There are different options available for your retirement plan investments. You should consider all options before making a decision. Our representatives can help you evaluate all of your distribution options.

American Century Investments is not responsible for and does not endorse any comments, content, advertising, products, advice, opinions, recommendations or other materials on or available directly or via hyperlinks to third party applications or websites. Logos or icons used are registered trademarks of their respective owners.