Retirement Plans for Small Business Owners: Building Long-Term Security for You and Your Team

Why Retirement Plans Matter for Small Business Owners

As a business owner, you work hard to grow your company and care for your employees. Establishing a retirement plan does both—helping you save for your own future while offering a meaningful benefit that can attract and retain top talent.

Employer-sponsored retirement plans allow you to make tax-advantaged contributions toward retirement while often providing deductions for your business. In return, you’ll need to include eligible employees in the plan and make contributions on their behalf—but the long-term payoff in financial security and employee satisfaction can be significant.

What Are the Best Retirement Plans for Small Businesses?

Choosing the Right Plan for Your Business

There are several types of retirement plans available to small businesses, each with advantages and trade-offs. Depending on your company size, cash flow, and long-term objectives, you might even benefit from a combination of plans. Below are some of the most common options available.

Profit-Sharing Plans

Profit-sharing plans are among the most popular employer-sponsored options. These plans allow you to make discretionary contributions to employees’ accounts, meaning you can decide when and how much to contribute each year. Contributions must be made on a recurring basis (not necessarily annually), and each participant has a separate account that’s credited with their share of contributions and investment earnings.

For example, if you had four employees earning $50,000 each and contributed a total of 25% of total eligible compensation, your deductible contribution would be limited to $50,000 ($200,000 × 25%).

2025 limits:

• Maximum contribution per participant: the lesser of 100% of compensation or $69,000
• Deduction limit: 25% of total eligible compensation
• Compensation cap for calculation: $345,000

Profit-sharing plans are flexible and cost-effective for business owners who want to retain control over annual contributions while rewarding employees for the company’s success.

401(k) and Solo 401(k) Plans

The most common small business retirement plan today is the 401(k). This plan allows employees to defer part of their salary, typically on a pre-tax or Roth basis, and lets employers make matching or profit-sharing contributions.

Employers can choose from several structures, such as:

• Traditional 401(k): Requires annual nondiscrimination testing.
• Safe Harbor 401(k): Automatically satisfies testing if the employer contributes either:
  • 100% match on the first 3% of pay and 50% on the next 2%, or
  • A flat 3% contribution to all eligible employees, regardless of participation.
• Qualified Automatic Contribution Arrangement (QACA): Automatically enrolls employees at 3% and gradually increases to 6% or more, encouraging participation while providing match flexibility.

If you’re self-employed with no employees (or only your spouse), a Solo 401(k) offers significant savings potential. You can contribute as both employer and employee, allowing much higher total contributions than most other plans.

2025 limits:

• Employee deferral limit: $23,500
• Age 50+ catch-up: $7,500
• Total annual additions (employee + employer): $69,000 (or $76,500 including catch-up)

401(k) plans can also include a Roth feature, allowing after-tax contributions that grow tax-free for retirement.

Example:
A 52-year-old owner earning $150,000 could defer $23,500, make a $7,500 catch-up, and contribute up to $34,000 as employer—totaling $65,000 in annual savings.

Money Purchase Pension Plans

These plans are similar to profit-sharing arrangements, but with one key difference: annual contributions are mandatory. The employer must make contributions based on a fixed formula outlined in the plan document, which is then allocated to participants’ accounts.

2025 limits:

• Individual contribution cap: $69,000 or 100% of pay
• Employer deduction limit: 25% of eligible compensation

While less flexible than profit-sharing plans, money purchase pension plans can be an effective tool for businesses seeking predictable, steady retirement contributions.

Defined Benefit and Cash Balance Plans

Defined benefit plans are the most sophisticated—and potentially the most rewarding—retirement plans for high-income owners. Instead of setting contributions, these plans define a benefit amount to be received at retirement, typically a percentage of final average pay.

An actuary calculates annual funding requirements to meet future benefits, and contributions are generally much higher than in defined contribution plans.

2025 limit:

• Maximum annual benefit: $275,000 or 100% of final average pay

Cash balance plans, a modern variant of defined benefit plans, provide similar benefits but are easier for participants to understand and combine well with 401(k) or profit-sharing plans. These are ideal for business owners looking to maximize tax deductions and accelerate retirement savings in the later stages of their careers.

SIMPLE IRA Plans

A SIMPLE IRA (Savings Incentive Match Plan for Employees) provides an easy, low-cost option for small businesses with 100 or fewer employees.

Employees can defer part of their compensation into the plan, while employers must either:

• Match employee contributions up to 3% of pay, or
• Make a fixed 2% contribution for all eligible employees.

2025 limits:

• Employee contribution: $16,000
• Catch-up (age 50+): $3,500, for a total of $19,500

SIMPLE IRAs are immediately vested, making them an attractive benefit but less advantageous for retention. Owners should also note they can’t maintain another retirement plan alongside a SIMPLE IRA.

Other Plan Types

SEP IRAs, ESOPs, and hybrid combinations of the above can provide additional flexibility for businesses seeking unique contribution formulas. With thoughtful design, business owners can often layer multiple plans to maximize personal savings and tax efficiency while rewarding employees fairly.

What’s New for 2025–2026?

• Enhanced Catch-Up Limits for Ages 60–63
  Starting in 2025, individuals aged 60–63 can make an extra catch-up contribution of $11,250, bringing their total allowable 401(k), 403(b), or 457(b) contribution to $34,750 ($23,500 base + $11,250 catch-up).

• Roth Catch-Up Requirement (Effective 2026)
  Beginning in 2026, all catch-up contributions for participants earning over $145,000 in 2025 must be made as Roth contributions. This means that high earners will pay tax upfront but enjoy tax-free withdrawals in retirement.

• Higher Contribution Thresholds Across Plans
  The IRS increased limits across multiple plan types for 2025, making this a great time to revisit your strategy. Reviewing your plan now can ensure compliance, optimize contributions, and help employees take full advantage of these new opportunities.

How Mission Wealth Can Help

Choosing, designing, and maintaining a retirement plan can feel complex—but you don’t have to do it alone. Mission Wealth helps business owners:

• Compare plan types based on your company size, goals, and cash flow,
• Maximize tax efficiency through multi-plan strategies,
• Ensure your plan remains compliant with IRS and ERISA requirements,
• Align your business retirement plan with your personal financial goals.

Whether you’re setting up a new plan or reviewing an existing one, our advisors can guide you toward a structure that fits your business and helps you and your employees retire with confidence.

Schedule a complimentary consultation or explore our related article: 4 Reasons Why a Financial Advisor Can Help Your Business.