Small business owners and side hustlers may have their eyes firmly fixed on growing their businesses, signing the next client, and banking their next dollar. But they can’t afford to lose sight of retirement.

Most small businesses don’t have any employees, and the ones that do have very few, according to the Pew Research Center, averaging about four paid workers each.

That may spell doom for retirement savings. Only 28 percent of firms with fewer than 10 workers offer a retirement, according to the Social Security Administration, compared to nearly 90 percent of companies with ten times the workforce.

It may be tempting to put off establishing a vehicle to build up your nest egg, but you cannot afford to. The average person in the decade before retirement has only amassed about $100,000 in retirement savings. That’s just not enough.

For side hustlers and fledgling titans

Roth IRA

  • Who can open one: Anyone
  • Cost and complexity: Low
  • Contribution limit: $5,500, or $6,500 if you’re 50 and up
  • Annual reporting requirement: None

A Roth IRA is easy to set up at any of the big name low-cost brokers (such as Vanguard and Fidelity), and offers the most benefits to lower-income workers. That might be perfect for you if you’re just starting out or taking a few jobs on the side.

Your contributions are made after-tax, but Uncle Sam gets nothing when withdraw after the age of 59-and-a-half. While that may seem less appetizing than the tax-free contributions you can make with a traditional IRA, you have the chance to practice some tax diversification.

Let’s say that you have a full-time job and you are just starting a side business that one day may trade on the NYSE. You should save 10 percent of your income from your regular job, including any match, in that company’s 401(k) plan, as well as 10 percent of your business earnings into a Roth IRA. You’ll enjoy a hedge against changes a future Congress may make to income tax rates.

One caveat: You can’t earn too much money. Eligibility for a Roth IRA in 2018 ranges from $189,000 to $199,000 for a married couple filing jointly. If that’s the case, consider a traditional IRA, although there are income limits if you or your spouse also contributes to a workplace retirement account.

For an established business with no employees

401(k) Plan

  • Who can open one: Self-employed business owners with no employees, other than a spouse
  • Cost and complexity: Medium
  • Contribution limit: $55,000 (or $61,000 for those 50 and older)
  • Annual reporting requirements: Ye

This plan has a lot of names, including Solo-k, Uni-k and One-participant k, and suitably treats you as two people: employer and employee.

As an employee of You Inc., you can contribute up to $18,500 into the plan, plus an addition $6,000 in catch-up contributions if you’re over 50. As the owner of You Inc., you can put in 25 percent of his business earnings, although this gets a little more complicated if you’re a sole proprietor or single-member LLC. The total can’t be more than $55,000 in 2018, and you can’t count earnings over $275,000.

So, let’s say you’re Julia, are 40, and your business took in $70,000. You can save $18,500, plus another $17,500, for a total of $36,000 this year. Not bad!

You will have to contend more paperwork, like a 1099-R, than with a SEP IRA (see below).


  • Who can open one: Any employer or self-employed person.
  • Cost and complexity: Low.
  • Contribution limit: 25 percent of employees’ net income up to $49,000.
  • Annual reporting requirements: None.

A SEP IRA, short for a simplified employee pension individual retirement account, resembles an IRA account for the self-employed, but with some extra perks.

You can contribute $5,500 — or $6,500 for quinquagenarians — in a traditional tax-deferred IRA. In a SEP IRA? The lesser of $55,000 in 2018 or 25 percent of your compensation, up to $275,000. The 10 percent of Americans who are their own boss take that 25 percent from net self-employment income. To be fair, that includes your SEP IRA contributions, so it’s really closer to a fifth of your gross business income.

You’re subject to the same penalties for early withdrawals as other IRA, so don’t touch the funds until you hit age 59-and-a-half, and you must take distributions by the age of 70-and-a-half. Withdrawals are subject to individual tax rates. IRS data show that SEP-IRAs are the least popular IRAs.

Compared to a Solo 401(k) plan there are fewer regulatory hoops to jump through, and it’s pretty simple to set up. Fill out a file IRS form 5305-SEP, you’ll notice on the upper right-hand corner that you don’t even need to mail it to the IRS, and go to a low-cost broker, such as Vanguard or Fidelity, to sign up.

Whatever percentage you allocate for yourself, you must also allocate to qualifying workers. That’s people over the age of 21, earning more than $600 and worked in your business three of the past five years.

If you’ve got a few employees

Simple IRA

  • Who can open one: Generally an employer with no more than 100 employees.
  • Cost and complexity: Low.
  • Employer contribution limit: 3 percent of employees’ pay, matching, or 2 percent nonelective.
  • Employee contribution limit: $12,500 (or $3,000 if you’re over 50).
  • Annual reporting requirements: None.

A SIMPLE IRA is just that — pretty simple — but the name is an acronym for Savings Incentive Match Plan for Employees.

The plans are designed for small businesses with no more than 100 employees who earned $5,000 or more on the payroll for the previous calendar year. But some advisers and tax professionals think these plans are more suited for much smaller companies.

“I typically recommend them for employers that have seven or less employees and for someone who is not making a boatload of money, so not looking to throw a ton into retirement,” says certified public accountant Bryan Hopkins, president of Hopkins Wealth Management. “Including instructions, the account application is about four pages to fill out, and you can do it in 10 minutes,” he says.

For the old schoolers


  • Who can open one: Any employer of any size
  • Cost and complexity: High
  • Employer contribution limit: Determined by a formula used to calculate the benefit an employee earns for retirement
  • Employee contribution limit: Not applicable
  • Annual reporting requirements: Yes

The most expensive and complicated retirement plan for the self-employed, the defined benefit plan, is most appropriate for someone with a mountain of money to save for retirement. But you need an actuary to determine the amount that can be contributed, which adds to the cost of the plan.

“The defined benefit plan will give you your largest contributions, but it comes with strings attached. For instance, you have to have a plan document and work with an actuary. It will be the most expensive to do and will require you to make a contribution every year,” says certified personal accountant Gerald Wernette, director of retirement plan services at Rehmann.

In contrast, the Solo-K, SEP and SIMPLE IRAs allow more flexibility by allowing employers to reduce contributions in a year with poor cash flow.