The Smart Business Owner’s Retirement Plan
It’s a frequent refrain among successful small business owners as they look toward retiring: “This business is my retirement.” And while there’s no question that most small business owners have invested not only their money, but also their blood, sweat, and tears into building a successful company, it’s often the case that simply looking to sell a business to the highest bidder as a means of funding retirement can have unexpected and unpleasant consequences, both for the seller and for the business itself.
The better news is that for small business owners and “solo-preneurs” looking to fund a successful small business exit and a satisfying retirement, several strategies can provide not only a tax-efficient and profitable off-ramp for the owner, but also a solid transition for the business, especially for those who may intend to keep the enterprise intact for ongoing operation.
Your Business, Your Retirement, and Your Goals
As small business owners look toward retiring and dialing back or terminating their involvement with the business, they may have several different goals in mind. Especially if the company is a family-run enterprise, they may be thinking of transitioning leadership and/or ownership over to a younger family member. Some may be intending to hand the reins to a trusted employee. Others may simply be shopping for a qualified buyer who can keep the business running, while still others may intend to simply liquidate the business and use the proceeds to fund their retirement and other desirable financial goals. Each of these outcomes has different requirements and different implications, both for the seller and the business and its stakeholders.
In addition, the owner may have a variety of needs to be met by the sale of the enterprise. These may include the need to enhance the value of the business once the owner steps back from day-to-day involvement, minimizing tax liabilities resulting from the sale, or diversifying personal wealth away from the business. (This last deserves special consideration, since 70–90% of small business owners have the majority of their personal net worth tied up in their companies.)
Your Future, Your Plan
It may seem obvious but it needs to be said, anyway: retirement planning for the small business owner should start many years before retirement starts looming on the horizon. One of the best ways to ensure that the business owner is caught near the end without options is to build a financial strategy that includes tax-efficient savings vehicles geared toward the needs of the small business owner. Aligning the plan with how the business operates and experiences cash flow can help the small business owner build secure retirement savings without the stress of having to fit too many expenditures into too small a budget.
Which Savings Vehicle Is Best for You?
Finding the right tax-advantaged savings vehicle can make a big difference in the success of a small business owner retirement plan. Plus, making smart use of tax-deductible retirement strategies can help savings grow faster and even generate tax savings in retirement.
Especially for business owners who might have gotten a bit of a late start on their savings, a plan that allows for higher amounts to be deposited each year can be a good way to make up lost ground.
Roth or Traditional?
The principal difference between Roth and traditional retirement accounts is when the funds are taxed. Traditional accounts allow for the deduction of contributed funds from taxable income for the year of the contribution. Funds grow without taxation, and when they are withdrawn in retirement (age 59 ½ or later), they are taxed as ordinary income. With Roth accounts, there is no deduction for contributions, but after growing tax-free, funds withdrawn in retirement are not considered as taxable income.
For many business owners, having a mix of Roth, traditional, and ordinary taxable investment accounts can allow for tax diversification, creating another tool for retirement planning that gives the retiree more control over when various sources of income are taxed. Also, traditional accounts may be converted to Roth accounts as a part of tax-efficient retirement planning.
Solo 401(k). This plan can be a good solution for solo practitioners with no employees other than a spouse, since it allows the plan owner to contribute as both employer and employee and, since there are no other employees, non-discrimination testing is not required. The plan can be funded with either pre-tax (traditional) or after-tax (Roth) dollars, depending on whether the owner believes they will be in a higher or lower tax bracket in retirement. In 2026, aggregate contributions to a solo 401(k) can be up to $72,000 for those age 50 and younger; persons older than that can make an additional catch-up contribution of $8,000, and those 60–63 can contribute up to an extra $11,250, if their plan permits.
Simplified Employee Pension IRA (SEP IRA). As the name indicates, this account operates much like an ordinary individual retirement account, with the difference that it can allow for much higher contributions than the $7,500 permitted for most plans in 2026. This plan works well for small business owners who have few employees, and it is usually easier and less expensive to set up and administer than a solo 401(k). Like the solo 401(k), however, up to $72,000 can be deposited in 2026 (or the lesser of this amount or 25% of eligible compensation). Also like the solo 401(k), contributions to a SEP IRA can either be from pre-tax or after-tax (Roth) dollars.
Defined benefit (pension) plans. These are most indicated for high-earning business owners, typically age 50 or more, who are looking to shelter larger annual amounts (often as much as $100,000–250,000) and secure more generous tax deductions (contributions are generally 100% tax-deductible for the business). These employer-sponsored plans, as the name indicates, provide a specified annual benefit for qualified employees upon their retirement (as opposed to specifying the amount to be contributed each year, as with IRAs, SEP IRAs, 401(k)s, and other “defined contribution” plans). Because these plans come with considerable administrative cost in addition to the higher annual funding, they should be considered only by businesses with stable, generous profits and, usually, a smaller number of high-earning individuals. There is no Roth option for defined-benefit plans.
A fiduciary financial planning expert can be of tremendous assistance in helping the small business owner select the most applicable plan for tax-efficient retirement funding, based on their goals for the business, their resources, and their most important priorities. As a fiduciary financial advisor, GEM Asset Management works with clients to develop personalized plans not only for retirement funding, but also for other important financial goals.