Planning for retirement as a business owner

Your small business is your life's work and your love's labor. But sooner than you think will come the day when it's time to rest on your laurels and retire. The key to retiring is to start early and stay strong. Grandkids and shuffleboard may be a long way off, but the time to start planning is now.

Exploring your options for something as important as your later years can feel overwhelming, especially when you're doing it all on your own.

Don’t worry. This guide will help you sort through your options so you can make a more informed choice about what’s best for you and your business.

Calculating your retirement

According to the Department of Labor, you'll likely need around 70% to 90% (PDF) of your preretirement income to sustain your current standard of living into your golden years. Using these percentages, and based on when you plan to retire, you can calculate how much you need to regularly invest in your retirement account now to be comfortable later. As a general rule, many experts say to aim for 15% annually, though your exact needs may be different.

So many different factors go into your retirement planning — and only you know your future vision. Will you move to a lower-income city? Downsize your home once the kids have flown the nest? Or do you envision your retirement filled with bucket list extravaganzas, a second home in a warmer climate, lots of travel, the sweet life for you and your loved ones? Most will find their number between that 70% and 90% based on what they want and their circumstances during their retirement years.

A financial professional can always help you hammer out the numbers and set you up with a sustainable plan. When in doubt, you may want to stay on the safe side. Your future self will thank your current self for the extra security.

Weighing your options

When it comes to planning for the future, there's no shortage of small business owner retirement options. It's important to know the pros and cons of each plan so that you can decide which is right for you. Here are three of the most popular retirement plans for small businesses. Be sure to consult with a tax advisor about your personal situation.

• Solo 401(k) — also known as the self-employed 401(k), individual 401(k), or one-participant 401(k). The Solo 401(k) is designed for small businesses with just one employee: you (and your spouse, if your spouse also earns income from the business). All you need is your employee identification number, and you can contribute to your plan both as an employer and an employee. Those contributions are generally tax-deductible as a business expense, as an added perk. However, there are restrictions on withdrawing money, just as with a traditional 401(k). Except under specific circumstances, withdrawing before age 59½ results in a direct tax penalty in addition to regular income taxes.
• SEP-IRA — the Simplified Employee Pension IRA. This plan provides flexibility to most business owners, from the self-employed to large corporations. With more generous contribution limits, this plan is well suited for those who want to extend benefits to their employees as well as themselves. SEPs are a fully employer-provided benefit, meaning employees can’t contribute their own money into the account through deposits or salary deferrals. Employers must contribute equally to every employee account, not to exceed 25% of the employee’s salary or $70,000. This provides flexibility for employers to contribute more during flush years and dial down contributions when cash flow is tight. Like Solo 401(k)s, you can access and withdraw your money at any time, but federal tax penalties apply if you’re under age 59½.
• Traditional 401(k) —This plan allows contributions from both the employer and the employee. Employee contributions can be tax-deferred or can be after-tax Roth contributions (that grow tax-free). Employer contributions are tax deductible business expenses. To encourage employees to stay, the employer contributions can be vested over a period of time. Employees may be able to take limited loans from their 401(k). Maximum employee contributions into the 401(k) in 2025 are $23,500 ($31,000 if age 50 – 59 or 64 and older; $34,750 if age 60 – 63). The maximum employer contribution in 2025 is $70,000 per person ($77,500 if age 50 – 59 or 64 and older; $81,250 if age 60 – 63)irs-pub-560. However, the total combined contribution by the employee and the employer cannot exceed the maximum employer contribution amount).

Setting up other long-term investments

There are other ways of compounding your savings over time to make your money work for you. Most retirement accounts allow you to invest your contributions tax-free. But what if you don't want limitations on when you can access your money or how much you can contribute at one time?

A standard individual brokerage account allows you to buy investments — stocks, bonds and funds — with your contributions, just as you can with a standard retirement plan. But unlike the IRA plans above, there are no limits to how much you can contribute into your account or when you can withdraw your money.

However, capital gains generated from your investments are directly taxed. And, of course, when you play with the stock market, there's always a risk of not seeing a return on your investments. To learn about the rewards and risks that come with these investments, speak with your accountant or financial advisor.

Getting started

The hardest part of any endeavor is the starting line. It's also the most important. Saving and planning now for the road ahead may be daunting, but you've got this. There are plenty of options for business owners who want to set themselves up for success and retire with ease. Speak with an advisor to discuss which plans can reliably support your retirement plans.

Looking for more information on how to set up a 401(k) for your business? We'll help you get a plan in motion.