Bussiness
Own a small business? These retirement plans can add up to savings now and later, too
Q: I have a small business that provides a great service, and I’m optimistic that 2025 will be a very profitable year for the company. Tell me about retirement plans that will allow me to defer pre-tax dollars, save current income tax and allow me and my employees to save for retirement. I want a plan that will fit both my business and my personal life.
A: Employees prioritize a company retirement plan with free money matching as an important benefit and loyalty may improve, adding value to your business.
The most common retirement plans are defined contribution plans, where the contribution amount is defined but the benefit is not. Think of 401(k) and 403(b) plans. Employee contributions are limited to $23,500 for tax year 2025, unless the participant is over 50, then the limit is $31,000. Employees who participate in these plans can defer their favorite amount from their paychecks, as long as it doesn’t exceed the max.
Often the employer provides a percentage match that is tied to a vesting schedule. The benefit to the employer is the matching contributions aren’t subject to FICA or FUTA. If an employee leaves before they are vested, then the unvested amount is distributed to remaining account owners or used to reduce employer contributions.
A defined benefit plan uses a formula based on salary, age and length of employment to calculate a monthly income after retirement. High-wage-earning business owners who have fewer employees may find this plan useful to accrue substantial benefits in a short time, because this plan allows higher contributions – and higher deductions – than other plans. An enrolled actuary is required to determine funding levels, and the vesting schedule can be as long as seven years.
Another choice for a small business retirement plan is the Simplified Employee Pension IRA (SEP-IRA). These plans are designed for self-employed individuals, partnerships, and sole proprietors, as well as independent contractors. All SEP-IRA contributions are made exclusively by the employer. These plans are restricted to employers who don’t have any other active qualified retirement plans. In 2025, contributions are limited to the lesser of 25% or $70,000 of compensation. Accounts are titled in each employee’s name. All contributions are discretionary, and they vest immediately.
A Savings Incentive Match Plan for Employees IRA (appropriately nicknamed the SIMPLE-IRA) is an IRA set up by a small employer (fewer than 100 employees). An employee can contribute up to $15,500, with a catch-up of $3,500 for 2025. The employer who sponsors the SIMPLE-IRA is required to make either a 100% match up to a maximum of 3% of compensation or a contribution of 2% for each eligible employee. All contributions are vested immediately, but employees who make withdrawals within the first two years are subject to additional penalties beyond the usual 10% early withdrawal penalty.
Small business owners have fiduciary responsibilities with these retirement plans. There are many rules and restrictions, so you may want to consult with your accountant and financial planner if you’re considering starting one. Deductible contributions are strictly enforced and often must be made before the date of the tax return (plus extensions).
Find a plan that fits your company, and don’t commit to a plan that you may not be able to sustain. If your business is cyclical, then don’t obligate the company to make retirement plan contributions when you’re strapped to make payroll.
Mary Baldwin, CFP®, is a fee-only financial planner at Buckingham Strategic Wealth in Indian Harbour Beach. Contact her at 321-428-4555 or mbaldwin@buckinghamgroup.com.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information may be based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. R-24-8053.
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