IRA Strategies for Small Business Owners

Whether you operate your business solo or have employees, setting up an IRA-based retirement plan is a smart strategy for your future and your business. You can build a nest egg for your retirement and diversify your investments from your business assets. If you have employees or want to recruit some, you’ll be able to offer them a valued employee benefit.

You don’t need to adopt a complex 401(k) plan to achieve your savings and investment goals. In fact, it may not serve your needs as well as an IRA-based plan that is designed specifically to meet the needs of a small business.


Benefits of an IRA-Based Plan

IRA-based retirement plans offer several benefits to business owners – but most importantly, they are easy and inexpensive to establish and administer. You can set up a SEP or SIMPLE IRA plan in minutes. Ongoing administration consists of making timely contributions and providing employee notices when required. Additionally:

  • Plan contributions are deposited into each employee’s IRA, so you don’t have any fiduciary responsibility for plan assets or investments.
  • There is no government reporting or nondiscrimination testing for you to complete.
  • Your contributions under the plan are tax deductible.
  • You have the freedom to invest your savings in alternative assets and the control to access your savings when you want.
  • If you have at least one employee, you can take a tax credit for any start-up costs in the first three years and for the first five years of contributions made for employees.

Each plan type has distinct features and requirements, so it’s important to pick the right plan for your business.


Simplified Employee Pension (SEP) IRA Plan

Best for owner-only businesses and start-ups/businesses with fluctuating profits year to year

 A SEP plan is like a profit-sharing plan in that only the business owner makes contributions under the plan. Contributions are made to the business owner’s and each eligible employee’s Traditional IRA. The contribution limit per person under a SEP plan is 25% of compensation up to the annual dollar limit, which is $66,000 for 2023. With a contribution limit this large, a SEP plan can be an effective way to reduce your taxable income, build your self-directed IRA balance, and invest in alternative assets.

You may choose whether to contribute each year, but if you do and you have employees, you must contribute the same percentage of compensation for each eligible employee. You may limit the employees who are eligible to receive a contribution to those who have reached age 21, earned at least $650 in the current year, and/or have worked for you in at least three of the last five years.

The deadline to establish a SEP plan and make contributions for a tax year is your business’s tax-filing deadline, plus extensions for that tax year.


Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan

Best for employers that want an easy, affordable plan that gives employees the opportunity to save for retirement

*Not available to employers with more than 100 employees who earned more than $5,000 in the preceding year or employers who maintain another retirement plan in the same year

 A SIMPLE IRA plan is a like a 401(k) plan in that employees may elect to defer a portion of their salary into the plan and the business makes tax-deductible matching or profit sharing-type contributions – but it is much easier and less costly to administer.

For 2023, an eligible employee may defer up to $15,500 of their salary into a SIMPLE IRA. If they are age 50 or older, they may defer an additional $3,500. In exchange for simplified administration, tax laws require the employer contribute to eligible employees’ SIMPLE IRAs each year. You may choose each year which type of contribution to make:

A matching contribution on employees’ salary deferrals up to 3% of their compensation (You may reduce the match to 1% or 2% in two years out of a five-year period.)
A nonelective contribution of 2% of compensation for each eligible employee (even if they are not deferring a portion of their salary into the plan)

You may limit the employees who are eligible to participate in the plan to those who have earned at least $5,000 in compensation during any two preceding years and/or who are expected to earn at least $5,000 in the current year.

The deadline to establish a SIMPLE IRA plan for a tax year is generally October 1.


Upcoming Enhancements

The SECURE 2.0 Act of 2022 enhanced SEP and SIMPLE IRA plans to make them even more attractive to small businesses. You can review these enhancements below:

Available upon release of IRS guidance–

  • Employers may allow employees to elect Roth IRA treatment for both employee and employer SIMPLE IRA contributions and SEP employer contributions. This allows employees to choose whether to pay tax on their retirement savings now or in retirement.

Available for SIMPLE IRA plans as of 2024–

  • Employers may make a nonelective contribution of up to 10% of an employee’s compensation, not to exceed $5,000. 
  • Employers may consider an employee’s qualified student loan payments as salary deferrals for purposes of making SIMPLE IRA matching contributions. 
  • Employers with up to 25 employees may allow deferrals and catch-up contributions up to 110% of the statutory limit in effect for the year. Employers with 26-100 employees may apply the increased limits only if the employer provides a 4% matching contribution or a 3% nonelective contribution. 

Available for SIMPLE IRA plans as of 2025–

  • Employees participating in a SIMPLE IRA plan at ages 60 – 63 will be permitted to make a catch-up contribution up to the greater of $5,000 or 50% higher than the SIMPLE catch-up contribution limit in effect for the year.


More Information 

IRA-based retirement plans can be a valuable tool for small businesses to maximize retirement savings. Learn more about SEP and SIMPLE IRAs and compare the benefits of each by visiting Types of Self-Directed IRAs on our website. Our articles, How Does a SEP Plan Work? and Is a SIMPLE IRA Plan the Right Fit? can also shed more light on the SEP and SIMPLE plan processes. If you have questions or are interested in setting up a SEP or SIMPLE IRA plan through your STRATA IRA, contact our self-directed IRA experts

Tags: 401k, all things retirement, IRA, ira contributions, retirement, SEP IRA, SIMPLE IRA, Traditional IRA, types of IRA