As a small-business owner, retirement planning can feel intimidating. You must choose the most appropriate retirement plan for both your business and your employees. Fortunately, several options exist for structuring retirement benefits effectively. In this guide, we review three popular choices for small businesses: SIMPLE-IRAs, SEP-IRAs, and 401(k)s. Additionally, this information helps you understand key differences before making a decision.

This article provides general information only and does not replace professional advice. Therefore, consult your tax, legal, and accounting professionals before implementing or changing any retirement plan.

SIMPLE-IRAs.

SIMPLE stands for Savings Incentive Match Plan for Employees.A SIMPLE-IRA functions as a traditional IRA designed for both employees and employers. Employers fund the plan by offering either matching contributions or nonelective contributions.
Meanwhile, employees contribute through salary reduction contributions to their own accounts. Many small business owners choose SIMPLE-IRAs because they reduce administrative and maintenance costs compared to other plans.¹

Distributions from SIMPLE-IRAs count as ordinary income. If taken before age 59½, withdrawals may trigger a 10% federal penalty. Additionally, required minimum distributions generally begin at age 73.

To qualify, a business typically employs fewer than 100 employees. Furthermore, the business cannot maintain other retirement plans simultaneously.¹

Distributions from SIMPLE-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.

For a business to use a SIMPLE-IRA, it typically must have fewer than 100 employees and cannot have any other retirement plans in place.¹

SEP-IRAs.

SEP plans (also known as SEP-IRAs) are Simplified Employee Pension plans. Any business of any size can set up one of these types of retirement plans, including a self-employed business owner. Like the SIMPLE-IRA, this type of retirement plan may be an attractive choice for a business owner because a SEP-IRA does not have the start-up and operating costs of a conventional retirement plan. This is a type of retirement plan that is solely sponsored by the employer, and you must contribute the same percentage to each eligible employee. Employees are not able to add their own contributions. Unlike other types of retirement plans, contributions from the employer can be flexible from year to year, which can help businesses that have fluctuations in their cash flow.²

Much like SIMPLE-IRAs, SEP-IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.

401(k)s.

401(k) plans are funded by employee contributions, and in some cases, with employer contributions as well. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals are taxed as ordinary income, and, if taken before age 59½, may be subject to a 10% federal income tax penalty.¹

1. IRS.gov, 2026
2. Investopedia.com, November 27, 2025

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.