Part 1 — Direct Answer

Small business owners have access to retirement plans with significantly higher contribution limits than employees — often $60,000-$70,000 or more per year depending on the plan type and income level. The most commonly used options are the SEP-IRA (simple, high contribution limits, no employees required), the Solo 401(k) (highest limits for owner-only businesses, Roth option available), the SIMPLE IRA (for businesses with employees), and the defined benefit plan (for high-income owners who want to shelter very large amounts). Choosing the right plan requires matching the structure to your income level, whether you have employees, and your retirement savings goals.

Part 2 — Detailed Explanation

Business owners have a significant retirement savings advantage over W-2 employees. Where an employee is limited to $23,000 (plus $7,500 catch-up if 50+) in a 401(k), a self-employed business owner can contribute both as employee and employer — dramatically expanding the annual contribution ceiling.

The SEP-IRA (Simplified Employee Pension) is the most commonly used plan for self-employed individuals and small business owners. Contributions are made entirely by the employer (the business) at up to 25% of net self-employment income, with a maximum of $69,000 in 2025. The SEP-IRA is simple to set up and maintain — there are no annual filing requirements and contributions can be made up to the tax filing deadline (including extensions). The downside is that if you have employees, you must contribute the same percentage to their accounts as you contribute to your own — which can make the plan expensive if you have staff.

The Solo 401(k), also called an Individual 401(k), is available to business owners with no full-time employees other than a spouse. It allows both an employee contribution (up to $23,000 in 2025, or $30,500 with catch-up) and an employer contribution (up to 25% of compensation), with a combined limit of $69,000 (or $76,500 with catch-up). The Solo 401(k) also allows a Roth option for the employee contribution portion — something the SEP-IRA does not offer. For a 50-year-old business owner with strong income who wants to maximize both total contributions and Roth accumulation, the Solo 401(k) is typically the superior choice.

The SIMPLE IRA is designed for businesses with up to 100 employees. It requires employer contributions — either a 3% match or a 2% non-elective contribution — for all eligible employees. Employee contribution limits are $16,000 in 2025 ($19,500 with catch-up for those 50+). SIMPLE IRAs are straightforward to administer but the mandatory employer contributions and lower employee limits make them less attractive than a 401(k) for most growing businesses.

For high-income business owners who want to shelter very large amounts, a defined benefit plan — often called a cash balance plan — allows contributions based on the benefit promised at retirement rather than a fixed percentage of income. Annual contributions to a defined benefit plan can exceed $200,000 for older, high-income owners, making it the most powerful accumulation vehicle available. The tradeoff is significantly more complexity and cost in administration, and the plan requires annual actuarial certification.

Part 3 — What This Means for You

If you are a small business owner in Phoenix or elsewhere in Arizona with significant self-employment income and you are not maximizing a retirement plan contribution, you are paying income tax on dollars that could be working tax-deferred. For a business owner generating $300,000 in net income, the difference between contributing nothing to a retirement plan and maxing out a Solo 401(k) is approximately $69,000 in pre-tax contributions — saving $16,000-$25,000 in federal income tax in a single year, plus Arizona state tax.

The decision between plan types — SEP-IRA, Solo 401(k), or defined benefit — depends on your specific situation. The Solo 401(k) with Roth option is the default recommendation for owner-only businesses that want maximum flexibility. The defined benefit plan is worth evaluating for owners over 50 with high consistent income who are behind on retirement savings.

Part 4 — Common Mistakes and Misconceptions

• The most common mistake is defaulting to a SEP-IRA for an owner-only business when a Solo 401(k) would allow significantly higher contributions and a Roth option. The SEP-IRA is simpler but the Solo 401(k) is almost always the better plan for someone without employees.
• The second mistake is not coordinating retirement plan contributions with the QBI deduction. The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of qualified business income. Retirement plan contributions reduce net income and can affect the QBI deduction calculation — the optimal contribution strategy requires modeling both simultaneously.
• The third mistake is waiting to set up a plan. Solo 401(k)s must be established before December 31 of the tax year for which you want to make contributions. SEP-IRAs can be established up to the tax filing deadline. Missing the Solo 401(k) setup deadline means waiting another year.