As a small business owner, you don’t have a built-in employer-matching plan to lean on for retirement planning. But you do have control over building wealth over time, and small business owners have access to some of the best retirement tools available. The key is knowing which tools to use. Here’s what to know.

Traditional 401(k) Plans

A traditional 401(k) is still one of the most effective and versatile ways to save. Small business owners can contribute to a traditional 401(k) as both the employer and the employee, which means a higher savings potential. And contributions are pre-tax, which lowers your current taxable income. This is a definite win for small business owners, but it comes with a tradeoff: more administration as annual filings, nondiscrimination testing, and oversight all come into play.

Roth 401(k)

With a Roth 401(k), you contribute after-tax dollars, so there’s no immediate tax break, but your withdrawals in retirement are tax-free. This approach could be a good fit if you expect your tax rate to be higher later. It’s not uncommon for business owners to use both a traditional and Roth 401(k). By using this diversification strategy, you can protect yourself from uncertainty around future tax rates.

SEP-IRA

The Simplified Employee Pension (SEP) IRA is easy to set up and maintain, which makes it popular among small business owners and self-employed individuals. You can contribute a percentage of your income each year. Contributions are tax-deductible, and there’s very little administrative paperwork.

Keep in mind that you generally need to contribute the same percentage for your employees as you do for yourself. That could get expensive as your team grows.

Solo 401(k)

If you’re self-employed with no employees (other than a spouse), a Solo 401(k) offers a lot of flexibility. You can contribute as both employee and employer, which often means higher total contributions than SEP-IRA plans. Establishing a Solo 401(k) is typically more involved than a SEP-IRA, but the flexibility and higher limits make it worth it for many business owners.

Combining Strategies

You aren’t limited to just one approach. Many business owners layer strategies to boost their tax benefits and retirement security. It’s a smart idea to work with a tax professional to understand how different plans work together to maximize contributions while staying within IRS rules and addressing long-term retirement goals.

Don’t Overlook Setup and Compliance

Retirement plans come with rules. Contribution limits, deadlines, deduction rules, and reporting requirements can be complex and ever-changing. This is why it helps to work with a qualified professional who understands the needs of small businesses. They can help you choose the right plan, avoid mistakes, and adjust as your business evolves.