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The Retirement Conundrum for Small Business Owners

The Retirement Conundrum for Small Business Owners

April 03, 2023

Living with risk is innate among small business owners. Whether enthusiastically or reluctantly, they must accept it as part of bypassing a corporate career. But the attributes of independence, optimism and confidence that are hallmarks of successful small business owners are the same traits that often cause them to delay or ignore planning for their future. Having little or nothing put aside for retirement should scare the devil out of them, but they treat it with the same indifference as postponing annual physicals. Many ignore planning because they are convinced reinvesting any leftover money in the business will make it that much more attractive to prospective buyers someday, and that will take care of their retirement needs.

Another issue for these go-getters is miscalculating how much they will need to maintain their lifestyle in retirement. They tend to underestimate future expenses and overestimate future income. Two years ago, as an advisor alerting them about the perils of inflation and diminished purchasing power, my caution was typically met with a shrug. Today, inflation is one of their biggest concerns, and rightly so. When the CPI jumps from 1% to 7% in a single year, even busy entrepreneurs take notice.

Data from recent surveys among small business owners reveals some alarming developments. Among 1,700 self-employed professionals and small business owners with fewer than 10 employees surveyed by Freshbooks, 40% have not managed to put away any retirement savings.

When asked why they are unable to save for retirement, responses ranged from “lack the profits to save for retirement” to “don’t see the need to save for retirement.” This means that not only do they not have a retirement savings plan, but neither do their employees.

A 2022 Transamerica Center for Retirement Studies survey found that post-COVID, nearly 20% now expect to retire later due to the pandemic and two-thirds of those expect to retire after age 65 or don’t plan to retire at all. Less than half have a backup plan for income if forced into retirement sooner than expected.

A SCORE survey asked small business owners lacking a retirement plan why they didn’t have one. Over 70% said because it is too expensive to set up. 50% said it’s due to lack of employee interest.

Other data indicates that employees do want retirement plans, however. Many cited a lack of retirement benefits as influencing their decision to leave their employer. 94% of small business owners with 401(k) plan in place report that it helps recruitment and retention. 52% say their retirement plan helps attract high-quality candidates.[1]


Small business owners—as well as their larger counterparts—were introduced to an additional element of financial risk thanks to the pandemic. COVID threatened the survival of thousands of small businesses across the country. Retailers, product manufacturers, distributors, service firms, even medical facilities suffered catastrophic losses, if they weren’t shuttered altogether.

One potentially positive effect of the pandemic is that it made a lot of owners cognizant of the fragile nature and hidden risks of business ownership. Being confronted with the reality that an outlier event could quickly destroy what had taken years or even decades to build, the meaning of risk took on new meaning for them. Those that had failed to put aside funds that could be tapped into for emergencies found themselves with few options, most of them unpalatable.

A 2020 survey of 5,800 small businesses by Alignable, a network of 4.6 million small businesses, helped clarify the economic impact of COVID. 43% of the businesses had temporarily closed, largely due to reductions in customer demand, employee health concerns and, to a lesser degree, supply chain issues.

Industries reporting in excess of 50% declines included retail, entertainment, personal services, food services and hospitality. Those engaged in finance, professional services and real estate-related businesses experienced somewhat less disruption but suffered financial loss nonetheless. Three-quarters of respondents had enough cash on hand to last just two months or less.[2]


In planning for retirement, small business owners and the self-employed alike should be aware of the impact inflation has on their future purchasing power. The annual inflation rate since the beginning of the millennium has been 2.7%, and for the past decade it has remained abnormally low at just 1.88%.

In recent years, warning business owners about the potentially destructive effects of inflation on their retirement portfolio was typically met with a shrug. Inflation was viewed as a non-factor. Then, in January 2022, inflation in the U.S. soared to 7.5% and the price of virtually everything from energy to groceries skyrocketed. Almost immediately, inflation became a very real concern for small business owners. The realization that accelerating inflation meant their money would buy incrementally less each year became crystal clear. They would need to save considerably more than they had previously thought in order to maintain their quality of life in retirement.

Business owners that had not yet started to save for retirement were now asking about the plans available to do so, and if there remained time to save enough to retire as planned.

Retirement Savings Plans

There are a number of retirement plans currently available to small business owners. Here is some basic information on the plans to help you get started.

  • Simplified Employee Pension IRA: A Simplified Employee Pension IRA (SEP-IRA) is the least complicated method of making tax-deferred retirement contributions for small business owners with 20 or fewer employees. SEP-IRAs have the advantage of low administrative costs combined with high contribution limits. Funded solely by employers, contributions are made directly to an IRA or individual employee annuity. For 2023, the annual employer contribution limit is $66,000 or 25% of compensation. Eligible employees receive the same percentage. SEP-IRAs do not allow any additional catch-up contributions.

  • Solo 401(k): Business owners with no employees other than a spouse—as well as self-employed individuals—will likely find the Individual or Solo 401(k) the best option. It provides all the benefits of a large-employer 401(k) plan: a tax break for savings, tax-deferred or tax-free growth and a liberal annual maximum contribution limit, the same as the SEP-IRA. In fact, The solo 401(k) can actually be even better because the individual, unlike large employers, is not bound by restrictive rules on the types of investments that can be held in the plan. While solo 401(k) plans are intended for one-person businesses, spouses of the business owner can also participate. Here, a qualifying couple could save as much as $132,000 annually, even more if they are eligible for catch-up contributions. The solo 401(k) also has a Roth option, discussed further on in the article.

  • 401(k): 401(k) plans for businesses with employees offer more flexibility in plan design. Funded by both employer and employee contributions, eligible employers may receive tax credits up to $16,500 over the first three years to offset the start-up costs. Offering a 401(k) can be an effective way of attracting top talent. Vesting schedules provide incentives for retaining vital employees. Annual contribution limits for 2023 are $22,500 for employees (not including matching employer contributions). Those age 50 and older can contribute an additional $7,500. The total employer-plus-employee contribution is $66,000.

  • Safe Harbor 401(k): A Safe Harbor 401(k) exempts employers from the nondiscrimination testing required with a traditional 401(k) plan, which reduces plan administration responsibilities. One caveat is that employer contributions to employees' accounts must be fully vested when made. Contribution limits are identical to a traditional 401(k).

  • Roth 401(k) and IRA: A Roth 401(k) differs from a traditional 401(k) in that contributions are made with money already taxed. Account earnings grow tax-free and no taxes are due upon withdrawals in retirement. Like the Roth 401(k), contributions to a Roth IRA come from earned income after income taxes. Unlike a traditional IRA, there’s no upfront tax break. Instead, the tax benefits come later since no income tax is owed on qualified withdrawals. Once the owner turns 59½ and the Roth IRA account has been open for at least five years, earnings may be withdrawn free of income taxes or penalties.

  • Creditor Protection: Money in 401(k) accounts is typically protected from creditors, bankruptcy proceedings and civil lawsuits, per ERISA. Money in IRA accounts are protected under a separate law, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), but only if the owner is filing for bankruptcy. Different states offer varying levels of protection.

  • Permissible Investments: Both 401(k) plans and IRAs have great latitude as to the investments owners can hold within their account. Stocks, mutual funds, ETFs, variable annuities and bonds, of course, but also alternative assets, such as real estate, private equity and placements and precious metals. Prohibited are physical assets, such as collectibles, paintings, gems, and the like, as well as life insurance contracts.

  • SECURE 2.0 Act: On December 23, 2022, Congress passed the Consolidated Appropriations Act containing numerous provisions aimed at retirement plan reform. Employers who start new retirement plans will be required to automatically enroll employees at a rate of at least 3% but not more than 10%, beginning in 2025. Excluded from this requirement are new companies in business for less than three years and businesses with 10 or fewer workers. Currently, participants age 50 and older can contribute an extra $7,500 per year annually into their 401(k) account. This amount will increase to $10,000 per year starting in 2025 for participants ages 60 to 63. There are also new rules for required minimum distributions (RMDs) from retirement savings accounts, a topic covered in the following section.


Taxes in Retirement

  • Taxation of Social Security Benefits: Social Security benefits become taxable at certain income limits. Whether you have to pay such taxes will depend on how much overall retirement income you and your spouse receive, and whether you file joint or separate tax returns. Generally, the higher that total income amount, the greater the taxable part of your benefits. For a married couple filing jointly, that threshold arrives at $32,000 adjusted gross income (AGI), which is the couple’s combined income minus deductions and exclusions. From $32,000 to $44,000, up to 50% of benefits are taxable and above $44,000, up to 85% of benefits are taxable. There is no tax break if you're married and file separate returns.

  • Taxes on IRAs and 401(k)s: You have to pay income tax at your regular tax rate when you withdraw money from tax-deferred accounts, such as traditional IRAs, 401(k)s and tax-deferred annuities. If you have a Roth IRA, you pay no tax on your accumulated earnings and interest provided you hold the account for at least five years before you qualify for tax-free provisions.[i]

  • Required Minimum Distributions: The SECURE 2.0 created major changes to the taxation of retirement savings, principally in the area of RMDs. The original SECURE Act of 2019 extended the age at which account holders—whether retired or still working—must begin taking RMDs from 70½ to 72, allowing seniors to keep money in tax-free retirement accounts a while longer. SECURE 2.0 permits seniors to delay taking RMDs an additional year (age 73) in 2023 and age 75 in 2033. Also, beginning in 2024, Roth account holders in employer plans will no longer be subject to RMDs. Finally, catch-up contributions for those aged 60 through 63 will be boosted from $7,500 to $10,000 annually to a workplace plan starting in 2025, and will be indexed to inflation.[ii]

  • Medicare: Your Medicare Part B (Medical Insurance) cost is based on your modified adjusted gross income (MAGI) as reported on your IRS tax return from two year’s previous. Your MAGI if your AGI plus certain deductions, such as nontaxable Social Security benefits, 50% of any self-employment tax, IRA contributions, rental losses and a few other items. For couples filing jointly in 2023 with a tax year 2021 MAGI of up to $194,000, the Part B monthly cost is $165. For MAGIs from 194k to 246k, the cost rises to $231; MAGIs up to $306k: $330 monthly; MAGIs up to $366k: $429 monthly; MAGI up to $750k: $528 monthly; and above $750k, the monthly cost is $561. As you can see, it is highly advantageous to minimize your MAGI for purposes of reducing your monthly Medicare premiums. Costs for separate drug plan adjustments are likewise staggered and based on MAGI, but the incremental raises are minimal, ranging from $12 to $76 monthly plus the plan premium.[i]

  • Moving to a Low-Tax State: I have not mentioned the potential impact taxation at the state level can have on your retirement. Depending on where you reside, the state and local tax burden can apply to investment income, pension income from 401(k) or IRA accounts and Social Security benefits, as well as estate and inheritance taxes. Kiplinger lists the ten most tax-friendly states for retirees (in ascending order) as Tennessee, Idaho, Arizona, District of Columbia, South Carolina, Nevada, Wyoming, Colorado, Hawaii and Delaware.

Getting Started

Regardless of whether a small business owner has a plan in place or not, there is no denying the advantages. Especially in smaller businesses, the retirement interests of employers and employees are closely linked. Both benefit from the reassurance that they can anticipate a more fulfilling retirement as a result of participating in a retirement plan.

The fly in the ointment for many owners is simply getting started. Many see offering a retirement plan as prohibitively expensive and time-consuming. For small businesses, the expense and time involved can appear to be insurmountable barriers, despite the best intentions of owners.

Choosing the best retirement option depends on your individual circumstances, the number of employees and other factors, and is best done with the help of an experienced advisor. Again, the most important aspect of planning for retirement is getting started. You are no doubt aware of the advantages of the compounding of interest over time. Simply put, the sooner you start saving, the more time your retirement account will have to grow.

In addition to helping ensure you enjoy a satisfying retirement, taking care of your key employees along the way is a smart business practice that will make your working years more pleasant and likely more profitable.

This material prepared by Journey Advisory Group is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Economies and markets fluctuate. Facts presented have been obtained from sources believed to be reliable. Journey Advisory Group, however, cannot guarantee the accuracy or completeness of such information, and certain information may have been condensed or summarized from its original source. Past performance is not an indicator of future results. 


[1] “Small Business Owners Aren’t Prepared To Retire,”

[2] Alexander W. Bartik, Marianne Bertrand, Zoe Cullen and Christopher Stanton, “The impact of COVID-19 on small business outcomes and expectations,” Economic Sciences, 10 July 2020.


[4] “SECURE 2.0: Rethinking retirement savings,” 03 Jan 2023.