The best IRA options for small businesses and the self-employed

When you run a small business or are self-employed, retirement can seem a long way off, sometimes even abstract.

Yet it's essential to plan your retirement savings well, especially as you don't automatically benefit from an employer-sponsored savings plan, as is often the case in larger companies.

Fortunately, Individual Retirement Accounts (IRAs), particularly SEP and SIMPLE IRA plans, offer solutions that are accessible, tax-efficient and relatively simple to set up.

Here's an overview to help you understand and choose the best option for your situation.

Why an IRA solution is key for the self-employed

In the United States, the Social Security system is generally not enough to ensure a comfortable standard of living in retirement. 

That's why it's essential to build up additional savings via a retirement account.

Individual Retirement Accounts (IRAs) are designed for this purpose, allowing you to invest for retirement while benefiting from a favorable tax framework. 

The Simplified Employee Pension (SEP IRA) and the Savings Incentive Match Plan for Employees (SIMPLE IRA) are the two most popular products for self-employed workers and very small businesses.

SEP IRA: Flexibility and high contributions

The SEP IRA is the solution of choice for the self-employed and small businesses with few or no employees. It is a simplified and improved version of the classic IRA, in which only employer contributions are permitted. 

This arrangement offers several notable advantages. Firstly, it offers a particularly high contribution ceiling, allowing up to 25% of annual compensation to be contributed, with a limit of $70,000 in 2025.

Another advantage is the plan's great flexibility. Employers are not required to contribute every year, making it particularly well-suited to entrepreneurs with irregular income. 

From a tax perspective, the SEP IRA allows contributions to be deducted from the company's taxable income, while gains generated by investments are tax-deferred until they are withdrawn.

Administrative simplicity is also a major advantage. You don't have to file a return with the IRS every year, just fill out and keep Form 5305-SEP.

However, this plan does have certain limitations. Since it is entirely employer-financed, it can quickly become costly if the company has several employees. 

In addition, the law requires that all eligible employees receive the same percentage of remuneration in contributions, which can limit the employer's budgetary flexibility. 

Finally, unlike other plans such as 401(k)s or SIMPLE IRAs, there are no catch-up contributions for those aged 50 or older. 

In short, the SEP IRA is an optimal solution for self-employed workers or very small structures with no or few salaried employees.

SIMPLE IRA: A collaborative and accessible retirement plan

The SIMPLE IRA has been designed for companies with 100 employees or fewer that offer no other retirement plan.

Unlike the SEP IRA, this plan is based on a logic of joint contribution, where both the employer and employees can contribute to the retirement account.

One of its main attractions lies in its collaborative operation. Employers can choose between two payment methods. Either a matching contribution equivalent to 3% of the remuneration of each contributing employee, or a flat-rate contribution of 2% for all eligible employees, whether or not they contribute.

The plan is also appreciated for its ease of implementation, which is much lighter than that of a 401(k) plan, and for the absence of any annual reporting requirements to the IRS. 

Employees can contribute up to $16,500 per year in 2025, with catch-up opportunities of up to $5,250, depending on their age and the size of the company's workforce.

For tax purposes, employer and employee contributions are deductible, while income generated by the plan is tax-deferred. 

In addition, the Secure 2.0 Act introduced a Roth version of the SIMPLE IRA, allowing after-tax contributions in exchange for tax-free withdrawals at retirement.

Despite its many advantages, the SIMPLE IRA has a few constraints. The employer is required to contribute each year, which can represent a substantial financial commitment, especially in times of economic instability.

In addition, early withdrawals during the first two years of participation are penalized at a rate of 25%, significantly higher than that applied to other types of IRA.

Finally, contributions are more limited than those offered by a SEP IRA or a 401(k), which may curb the savings ambitions of high-income entrepreneurs.

All in all, the SIMPLE IRA is an attractive option for small businesses with employees, especially those wishing to offer a structured benefit to their employees, without incurring the complexity and cost of a 401(k) plan.

SEP IRA or SIMPLE IRA: Which option to choose?

The SEP IRA and the SIMPLE IRA are two simple and advantageous solutions for preparing for retirement, but they are aimed at different profiles.

The SEP IRA offers maximum flexibility. Contributions are optional, paid solely by the employer, and can amount to 25% of compensation, up to $70,000 in 2025.

Employees, however, cannot contribute. This plan is therefore ideal for the self-employed or small structures without employees.

The SIMPLE IRA, on the other hand, provides for mandatory employer contributions (2% or 3% depending on the formula), but also allows employees to contribute up to $16,500, with catch-up options.

Less generous in terms of ceiling than the SEP, it has the advantage of encouraging employee participation. It is therefore best suited to small businesses with a few employees who wish to offer an employee benefit without the complexity of a 401(k).

Both plans are simple to manage, with few administrative constraints. But in short, the SEP IRA focuses on flexibility and high amounts, while the SIMPLE IRA favors employer-employee collaboration in retirement savings.

More than just savings

Whether a SEP or a SIMPLE IRA, these accounts are part of a broader retirement planning strategy. They enable entrepreneurs to build up capital to supplement their Social Security, while benefiting from immediate tax reductions and tax-deferred income.

What's more, the funds invested in an IRA can be allocated to a wide range of assets: Equities, Bonds, ETFs, Mutual Funds... This allows the level of risk to be adjusted according to age, objectives and personal situation.

A strategic choice for small structures

Between the flexibility of the SEP IRA and the collaborative aspect of the SIMPLE IRA, Individual Retirement Accounts represent powerful tools for preparing for retirement when you're an entrepreneur or self-employed.

Choosing the right plan will depend above all on the size of your structure, your financial stability, and your willingness (or not) to include your employees in the process.

In an environment where retirement increasingly relies on individual savings, these solutions enable small businesses to take a major step forward.