If you have yet to develop a retirement plan for your business, or if you’re not sure the plan you’ve chosen is the right one, here are a few important considerations.
How much can my business afford to contribute?
The cost of contributions can often be managed based on the type of plan you choose.
A simplified employee pension plan (SEP) is funded by employer contributions only. SEP contributions are made to separate IRAs for eligible employees.1
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs blend employee and employer contributions. For example, some employers match employee contributions up to 100% of the first 3% of compensation. Others may contribute 2% of each eligible employee’s compensation. It’s up to the employer to decide the formula based on what works best for the business.2
A 401(k) is primarily funded by the employee; the employer can choose to make additional contributions, including matching contributions.3
What plan accommodates high employee turnover?
The cost of covering short-tenured employees can be managed through eligibility requirements and vesting schedules.
With a SEP-IRA, only employees who are at least 21 years old, earn at least $800 in compensation in 2026, and have worked for the employer in three of the last five years must be covered.4
A SIMPLE IRA must cover employees who have earned at least $5,000 in any two prior years and are reasonably expected to earn at least $5,000 in the current year.5
A 401(k) or defined benefit plan must generally cover employees who are at least 21 years of age and who have either worked 1,000 hours in a single year or at least 500 hours per year for three consecutive years.6,7
Vesting is immediate for all SEP-IRA contributions, SIMPLE IRA contributions, and 401(k) employee deferrals. However, a vesting schedule may apply to 401(k) employer contributions and defined benefit plans.
Do I want to maximize contributions for myself (and my spouse)?
The SEP-IRA and 401(k) allow for higher contribution limits than the SIMPLE IRA. For business owners who are starting later or seeking significantly higher contribution levels, a defined benefit plan may allow for even greater contributions.
My priority is to keep administration easy and inexpensive.
The SEP-IRA and SIMPLE IRA are generally straightforward to establish and maintain. A 401(k) can be more administratively complex, though certain testing requirements may be eliminated by using a Safe Harbor 401(k). In most cases, defined benefit plans are the most complex and costly to establish and maintain.
Conclusion
Choosing the right retirement plan is ultimately about finding the balance between what your business can sustain, what your employees value, and what supports your own long-term financial goals. The key is selecting an option that fits your needs today while allowing flexibility as your business evolves. At SHJ Wealth Advisors, we can work with business owners to design thoughtful retirement plan strategies, and our in-house retirement plan specialist helps ensure complex plans are implemented smoothly. Please reach out to Info@shjwealthadvisors.com if you would like to find a time to meet with one of our CFP® Professionals and thanks for reading!
1. Like a Traditional IRA, withdrawals from a SEP-IRA are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. In most circumstances, you must begin taking required minimum distributions at age 73, or at age 75 for those born in 1960 or later.
2. Like a Traditional IRA, withdrawals from a SIMPLE IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. In most circumstances, you must begin taking required minimum distributions at age 73, or at age 75 for those born in 1960 or later.
3. In most circumstances, you must begin taking required minimum distributions at age 73, or at age 75 for those born in 1960 or later. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.
4. IRS.gov, 2026
5. IRS.gov, 2024
6. IRS.gov, 2024
7. Congress.gov, 2024
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.
