Business Owner Retirement Plans

Matt Butler and Colin Kelty |

It's difficult to know what retirement alternatives are open to small companies as they expand. How do you choose the ideal retirement plan for your company and its employees, especially if you're a first-time entrepreneur?

There are many alternatives for developing retirement plan ideas for your employees. SIMPLE-IRAs, SEP-IRAs, and 401(k)s are three of the most popular options for small businesses.



SIMPLE-IRAs are easy to set up. The acronym "SIMPLE" stands for Savings Incentive Match Plan for Employees. This is a typical IRA that can be established for employees and employers, allowing both groups to contribute funds.  Some small business owners choose a SIMPLE- IRA since the administrative costs appear to be lower than other options.

SIMPLE-IRAs are taxed as ordinary income, and if withdrawn before age 59½, may be subject to a 10% federal penalty. After you reach age 72, you must begin making the required minimum withdrawals.

To establish a SIMPLE-IRA, the business should have fewer than 100 workers and cannot already be contributing to another retirement plan.  Employers must contribute a minimum of 3% of pay to each employee's account and allow employees to elect to contribute up to another 2%.



“SEP” stands for simplified employee pension plans (SEP-IRAs).  The SEP earns the “simplified” in its name and stands as an attractive choice for business owners looking to maximize contributions while minimizing their administrative responsibilities.

SEP-IRAs operate in the same manner as SIMPLE-IRAs and are taxed like ordinary income.  A SEP-IRA can be established by sole proprietors, partnerships, and corporations, including S corporations.


The advantages of the SEP begin with the flexibility to vary employer contributions each year from 0% up to a maximum of 25% of compensation, with a maximum dollar contribution of $57,000 in 2020, and $58,000 in 2021.

If you begin taking required minimum distributions before you reach age 59½, you will be penalized 10% on top of your regular federal income tax rate. After you've reached age 72, you must start making mandated minimum withdrawals.

One advantage of the SEP-IRA is that it can be established with a smaller amount of cash than other options. There are, however, strict limits on participating employees and their compensation. In 2020, your business must have up to 25 or fewer participating employees and $600 or less in employee compensation for each individual for the year to qualify.



A 401(k) is the most common retirement plan.  Nearly half of all workers are enrolled in some type of 401(k) plan, whether at their current job or a previous one. The 401(k) offers many features and benefits, including tax breaks for both the employer and the employee.  Employers can deduct their contributions, and employees' contributions are made with pretax dollars, reducing their current taxable income.

Eligible employees can begin contributing to a 401(k) as soon as the company allows, and the contributions can grow in a tax-deferred retirement account until they are withdrawn. However, there are some restrictions on when you can begin taking withdrawals. 401(k) plans typically require participants to be at least 59½ years old or have left their current employer before they can start withdrawing funds without penalty.


Additional Options For High Income Business Owners:

Defined Benefit Plan

Another option for high-income business owners is a defined benefit plan. A defined benefit plan is an employer-sponsored retirement plan that allows you to save more money by making higher contributions than other plans typically allow. The primary advantage of a defined benefit plan is the ability to make higher annual contributions and maximize your retirement savings, especially if you have a high income. The maximum amount you can contribute to your plan depends on how much you'll get when you retire, your age, and projected returns.

However, there are also some downsides to defined benefit plans. These plans can be complex and may require professional management, which can increase your administrative costs. Additionally, you may not be able to access your funds until you reach retirement age.


If you would like to know more please visit or contact:


Colin C. Kelty

President/Co-Founder,  Senior Financial Advisor

AFIN Family Wealth Management

1220 Kensington Rd, Suite 220, Oak Brook, IL 60523

T: 630-686-1462    C: 312-505-9698


Matt Butler

Investment Executive 

AFIN Family Wealth Management

One Northfield Plaza, Suite 521, Northfield, IL 60093

Direct: 630-686-3267