Small Business Retirement Planning: Building Wealth While Running Your Business

Building a successful business is great. But if all your wealth is tied up in that business, what happens when you’re ready to stop working?

Many small business owners neglect personal retirement planning because they assume the business will fund their retirement. That’s a risky bet.

Here’s how to build retirement security while running your business.

Why Business Owners Need Retirement Plans

The “My Business Is My Retirement” Problem

Many owners assume they’ll:

• Sell the business and retire on the proceeds
• Pass it to children who’ll pay them
• Keep working because they love it

The reality:

• Most small businesses don’t sell for much (if at all)
• Family succession often fails
• Health or circumstances may force retirement
• Burnout happens

Your business is not a retirement plan. It’s a source of income that should fund your retirement plan.

Tax Advantages Are Significant

Retirement contributions offer immediate tax benefits:

• Reduce taxable income now
• Grow tax-deferred
• Potentially withdraw at lower tax rates later

For a business owner in the 32% bracket, a $50,000 retirement contribution saves $16,000 in current taxes.

Building Wealth Outside the Business

Diversification matters. Having wealth outside your business means:

• Less pressure on business performance
• Options if the business struggles
• Negotiating power if selling
• Peace of mind

Retirement Plan Options for Small Business Owners

SEP IRA (Simplified Employee Pension)

Best for: Solo operators or businesses with few employees who want simplicity

2026 contribution limits:

• Up to 25% of net self-employment income
• Maximum around $69,000 (check current limits)

How it works:

• Employer-only contributions (as the owner, you’re the employer)
• Easy to set up and administer
• Flexible—contribute when you can, skip when you can’t

Pros:

• Simple setup (one page form)
• No annual filing requirements
• High contribution limits
• Flexibility in contributions

Cons:

• Must contribute same percentage for employees (if any)
• No Roth option
• No catch-up contributions (age 50+)
• No loans against the account

Best for: Solopreneurs or those with no/few employees wanting maximum simplicity.

Solo 401(k) (Individual 401(k))

Best for: Self-employed individuals and business owners with no employees (other than spouse)

2026 contribution limits:

• Employee deferral: Up to $23,000 (plus $7,500 catch-up if 50+)
• Employer contribution: Up to 25% of compensation
• Total maximum: Around $69,000 ($76,500 with catch-up)

How it works:

• You act as both employer and employee
• Make employee deferrals from salary
• Make employer profit-sharing contributions

Pros:

• Highest potential contribution amounts
• Roth option available
• Catch-up contributions available
• Loans allowed
• Can include spouse as employee

Cons:

• More complex than SEP
• Annual filing required if over $250,000
• Not for businesses with non-owner employees

Best for: High-earning solopreneurs wanting maximum tax-advantaged savings.

SIMPLE IRA (Savings Incentive Match Plan)

Best for: Small businesses with employees who want straightforward matching

2026 contribution limits:

• Employee: Up to $16,000 (plus $3,500 catch-up if 50+)
• Employer: Match up to 3% or 2% non-elective contribution

How it works:

• Employees can contribute
• Employer either matches or contributes for all
• Easy to administer

Pros:

• Simple for employers
• Lower administrative burden than 401(k)
• Employees can participate

Cons:

• Lower contribution limits
• Employer matching required
• Early withdrawal penalties higher (25% in first 2 years)

Best for: Businesses with employees who want simplicity over maximum contributions.

Defined Benefit Plan (Cash Balance Plan)

Best for: High-income owners over 40 who want aggressive retirement savings

Contribution limits: Can exceed $200,000 annually depending on age and design

How it works:

• Pension-style plan with defined future benefit
• Actuarially determined contributions
• Complex but powerful

Pros:

• Highest contribution limits possible
• Great for older, high-income owners
• Predictable retirement benefit

Cons:

• Complex and expensive to administer
• Requires ongoing contributions (less flexible)
• Needs actuary involvement

Best for: High earners over 50 looking to shelter significant income.

Comparing Your Options

Feature	SEP IRA	Solo 401(k)	SIMPLE IRA	Defined Benefit
Max contribution	~$69,000	~$76,500	~$19,500	$200,000+
Catch-up allowed	No	Yes	Yes	N/A
Roth option	No	Yes	No	No
Employees allowed	Yes*	No	Yes	Yes
Loan allowed	No	Yes	No	No
Complexity	Low	Medium	Low	High
Admin cost	Minimal	Low-Medium	Low	High

*SEP requires same percentage contribution for all eligible employees

How Much Should You Save?

Start With a Target

Rules of thumb:

• Save 10-15% of income for retirement
• Aim for 10-12x your annual income by retirement age
• Increase contributions as income grows

Reality for business owners: You’re likely behind if you haven’t been contributing. Catch-up contributions and higher limits help.

Consider Your Timeline

Years to retirement affects strategy:

• 30+ years: Growth focus, more aggressive
• 20-30 years: Balanced approach
• 10-20 years: Maximize contributions, moderate risk
• Under 10 years: Maximum contributions, preserve capital

Factor in Social Security (Yes, You Pay)

Self-employed individuals pay full self-employment tax (employer + employee portions). You’ll receive Social Security benefits based on earnings history.

Social Security should be a supplement, not your plan.

Funding Your Retirement Contributions

The Profit First Approach

If using Profit First:

• Your PROFIT account funds distributions
• A portion of profit should go to retirement
• Build contribution into your quarterly rhythm

Example allocation:

• 50% of quarterly profit distribution: Owner lifestyle/reinvestment
• 50% of quarterly profit distribution: Retirement + emergency fund

Timing Contributions

Throughout the year:

• Employee deferrals (401k) must be timely
• Smooths cash flow impact
• Dollar-cost averaging into investments

Year-end or tax time:

• SEP IRA can be contributed up to tax filing deadline (including extensions)
• Solo 401(k) employer contributions same
• Allows flexibility based on profitability

When Cash Is Tight

No one says you must max out contributions. Contributing something is better than nothing.

Prioritization:

1. Emergency fund (3-6 months)
2. Minimum retirement contribution (start the habit)
3. Pay down high-interest debt
4. Increase retirement contributions
5. Max out retirement if possible

Investment Strategy

Asset Allocation Basics

Stocks: Growth potential, more volatility Bonds: Income and stability, less growth Real estate (REITs): Diversification, income

General guidance by age:

• 30s: 80-90% stocks, 10-20% bonds
• 40s: 70-80% stocks, 20-30% bonds
• 50s: 60-70% stocks, 30-40% bonds
• 60s: 50-60% stocks, 40-50% bonds

These are guidelines—your situation may differ.

Target-Date Funds

If you don’t want to manage investments:

• Choose target-date fund for your retirement year
• Automatically adjusts allocation over time
• Simple, low-maintenance

Keep Fees Low

Over decades, fees compound significantly:

• 1% annual fee on $500,000 over 20 years: $100,000+ cost
• Low-cost index funds typically 0.03-0.20%
• Actively managed funds often 1%+

Low-cost index funds beat most actively managed funds over time.

Tax Strategies

Maximize Deductions

Retirement contributions are above-the-line deductions:

• Reduce federal income tax
• May reduce state income tax
• May reduce self-employment tax indirectly

A $50,000 contribution at 32% saves $16,000 in federal taxes alone.

Roth vs. Traditional

Traditional contributions:

• Tax deduction now
• Taxable withdrawals later
• Best if tax rate higher now than in retirement

Roth contributions:

• No deduction now
• Tax-free withdrawals later
• Best if tax rate lower now than in retirement

Business owners often benefit from traditional contributions during high-earning years.

Consider Backdoor Strategies

If income exceeds Roth IRA limits:

• Contribute to traditional IRA (non-deductible)
• Convert to Roth IRA (taxes on any gains)
• Builds tax-free Roth balance

This is complex—consult a tax professional.

Common Retirement Planning Mistakes

Mistake 1: Waiting to Start

Compound interest needs time. Starting 10 years earlier could double your retirement balance.

Start now, even if small. Increase as you can.

Mistake 2: All Eggs in the Business

Your business is not diversification. Build wealth outside it.

Mistake 3: Not Adjusting for Business Structure

SEP IRA limits are based on net self-employment income. Solo 401(k) employee deferrals allow more at lower incomes.

Match your plan to your structure and income.

Mistake 4: Ignoring Catch-Up Contributions

At 50+, you can contribute more:

• 401(k): Additional $7,500
• SIMPLE IRA: Additional $3,500
• IRA: Additional $1,000

Maximize these in your high-earning years.

Mistake 5: Raiding Retirement Early

Early withdrawals face:

• Income taxes on withdrawal
• 10% early withdrawal penalty (before 59½)
• Lost compound growth

Retirement funds should be last resort, not emergency fund.

Getting Started

Step 1: Assess Your Situation

• Current retirement savings
• Years to retirement
• Target retirement income
• Current cash flow ability

Step 2: Choose Your Plan

Based on:

• Business structure (employees or no)
• Income level
• Contribution goals
• Desired complexity

Step 3: Open Accounts

• SEP IRA: Most brokerages, minimal paperwork
• Solo 401(k): Brokerages or plan providers
• SIMPLE IRA: Requires plan document
• Defined benefit: Needs professional setup

Step 4: Fund Contributions

• Set up automatic contributions if possible
• Build into monthly/quarterly rhythm
• Treat as non-negotiable expense

Step 5: Invest Appropriately

• Choose low-cost index funds
• Match risk to timeline
• Review and rebalance annually

Step 6: Review Annually

• Are you on track?
• Can you contribute more?
• Does your plan still fit your situation?
• Meet with financial advisor if needed

Working With Professionals

Financial Advisor

Helps with:

• Investment strategy
• Retirement planning
• Risk assessment
• Estate planning

Look for fee-only fiduciaries (not commission-based).

CPA/Tax Professional

Helps with:

• Plan selection for tax optimization
• Contribution calculations
• Tax impact projections
• Coordination with business taxes

Retirement Plan Administrator

For more complex plans (defined benefit):

• Plan design
• Compliance
• Annual filings
• Actuarial calculations

The Bottom Line

Retirement planning as a business owner requires intentionality. You don’t have an employer matching your 401(k). You don’t have automatic payroll deductions. You have to make it happen.

The good news: You have options unavailable to employees—higher contribution limits, more flexibility, and significant tax advantages.

Start now. Contribute consistently. Let compound interest work for you.

Your future self will thank you.

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Need help building retirement planning into your finances? At Profit Path Books, we implement Profit First to help you allocate for profit, taxes, and yes—retirement. Book a consultation to discuss how to build sustainable business finances.