What is the Best 401(k) for Small Business Owners?

As a small business owner, you wear many hats – CEO, marketer, accountant, and chief problem-solver. So, planning for retirement shouldn’t become another overwhelming burden. The right 401(k) plan can be your strategic advantage, helping you secure your financial future, diversify your assets beyond your business, and attract and retain valuable employees.

Choosing the best 401(k) for your small business requires understanding the unique benefits and considerations of each plan type. Whether you’re a solo entrepreneur or manage a growing team, there’s a retirement solution designed to align with your business goals and personal financial aspirations. Let’s explore four 401(k) options that can help you build wealth while managing your business effectively.

Traditional 401(k): The Foundation of Business Retirement Planning

Traditional 401(k) plans are a popular choice for small business owners who want to give themselves and their employees a structured, high-limit way to save for retirement. They operate on a pre-tax contribution basis, meaning money is deducted from paychecks before taxes are applied, allowing savings to grow tax-deferred until retirement.

Key Benefits:

• Higher Contribution Limits: In 2025, employees can defer up to $23,500 and employers can contribute on their behalf for a max total of $70,000 per year. For those aged 50 and up, catch-up contributions allow for even higher limits.
• Tax-Deferred Growth: Contributions lower current taxable income, and investment growth is not taxed until withdrawals begin in retirement.
• Employer Match Options: Employers can choose to match employee contributions, boosting participation and retirement savings.
• Flexible Plan Design: Traditional 401(k)s can be tailored to include features like vesting schedules and a variety of investment options to suit your business needs.

Limitations to Consider:

• Administrative requirements can be more complex and costly than other small business retirement plans.
• Annual IRS filings and plan testing for nondiscrimination may require the help of a third-party administrator.
• There may be required minimum distributions (RMDs) beginning at age 73, impacting future tax planning.

This Might Be Right For You If:

• You want to offer a competitive benefit to attract and retain talented employees.
• Your business is growing, and you have (or plan to have) multiple employees.
• You’re interested in maximizing pre-tax retirement savings, both for yourself and your team.
• You value flexibility in plan features, employer matching, and investment choices.

Profit-Sharing 401(k): Flexibility Based on Performance

A profit-sharing 401(k) allows business owners to make discretionary contributions to employees’ retirement accounts, based on company profits for the year. This plan can be offered alone or combined with a traditional 401(k) for even more flexibility.

Key Benefits:

• Flexible Contributions: Employers can decide each year how much to contribute based on business profitability; contributions may range from zero up to the IRS limits.
• High Contribution Limits: The limits are the same as a traditional 401(k).
• Employee Motivation: Linking contributions to profitability can help draw a direct connection between company performance and employee rewards.
• Attract and Retain Talent: Shows employees that your business is invested in their future, making your workplace more competitive.

Limitations to Consider:

• Profit-sharing plans can require more complex administration and nondiscrimination testing.
• Contributions must follow a fair, pre-defined formula for all eligible employees.
• May require more employee communications and plan oversight compared to simpler retirement plans.

This Option Might Be Right For You If:

• Your business has fluctuating profits and you want the flexibility to adjust retirement contributions each year.
• You’re looking for a way to reward employees for the company’s success.
• You want a plan that encourages productivity and loyalty.
• You would like to combine this plan with 401(k) employee deferrals for enhanced savings options.

Safe Harbor 401(k): Eliminating Compliance Headaches

Safe harbor plans are a specialized form of traditional 401(k)s designed to automatically satisfy IRS nondiscrimination requirements by making mandatory employer contributions. This streamlines plan administration and ensures all employees, regardless of compensation, have equitable access to retirement benefits.

Key Benefits:

• No Nondiscrimination Testing: Safe harbor contributions exempt your plan from complex IRS testing, simplifying compliance for business owners.
• Mandatory Employer Contributions: Employers choose either matching or nonelective contributions, both of which help employees build retirement savings.
• High Contribution Limits: The limits are the same as a traditional 401(k).
• Attracts Top Talent: The guarantee of employer contributions makes your business more appealing to prospective and current employees.

Limitations to Consider:

• Employer contributions are mandatory and must be immediately vested, which can increase costs if you have a large workforce.
• Less flexibility than some other 401(k) options, as annual contributions are required regardless of business performance.
• Plan setup and ongoing compliance still require some administrative oversight.

This Might Be Right For You If:

• You want to avoid the risk and hassle of failing IRS nondiscrimination testing.
• You’re committed to making annual contributions to employee retirement accounts.
• You want to provide a highly competitive retirement benefit to attract and keep top employees.

Solo 401(k): Designed Just For You (& Your Spouse)

If you’re a sole proprietor or have no employees besides your spouse, a solo 401(k)—also known as an individual 401(k)—can be a powerhouse retirement plan. 

Key Benefits:

• High Savings Potential: You can contribute to your plan both as an employee and as an employer for a combined limit of $70,000 annually (as of 2025). Again, if you’re 50 and older, those limits will be higher.
• Roth Option: Many Solo 401(k) plans include a Roth feature, allowing for after-tax contributions and tax-free withdrawals in retirement.
• Loan Provisions: Certain plans allow you to borrow against your savings, offering a financial safety net when needed.

Limitations to Consider:

• Only available if you don’t have full-time employees other than a spouse.
• More administrative oversight is required with annual IRS filings (once assets exceed $250,000).

This Might Be Right For You If:

• You are self-employed or run a business with no full-time employees other than your spouse.
• You want the flexibility to make both employer and employee contributions.
• You don’t mind a bit of extra paperwork or administrative responsibilities as your plan grows.

Other Options to Consider:

It’s important to note that a 401(k) is not your only retirement option. There are several other retirement vehicles—including SEP IRAs, SIMPLE IRAs, ESOPs, and defined benefit plans (such as traditional pensions and cash balance plans)—that may be worth exploring as well. Continue to visit our Education Center for more guidance on these retirement options, or consult your financial advisor to learn more.

Most Importantly, Get Started Now:

Choosing a 401(k) plan shouldn’t be a guessing game. The financial decisions you make today can shape your retirement lifestyle and your business legacy.

That’s why it’s important to talk to a financial advisory team, like Advent Partners, that specializes in helping entrepreneurs like you. Together with your financial advisor, you can analyze your specific situation, evaluate each plan type’s benefits and costs, and implement a solution that aligns with your values and financial objectives.

Ultimately, as with most things related to retirement planning, the best thing you can do is get started today. Your future self will thank you for taking action now.