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401K For Small Business Owners

Let us be clear that the purpose of this article is to inform business owners who are employed by their business on their eligibility, contributions and workings of the 401K for small business owners.

There are many names for the small business owners 401K like, Solo 401K, Individual 401K, Self employed 401K (this is possibly the best descriptor) and others.

Small business 401K eligibility

If you are a msall business owner and employed by your business in the eyes of the IRS, then you and your spouse are eligible to make contribustions to the 401K for small business.

1. You do not have to be a sole propreitor
2. Corporations, limited liability companies (LLCs), and partnerships may also make use of the plans

When are business owners seen as being employed by the business?

In order to make contributions to a small business 401K plans it is essential that you meet the requirements of the IRS. There are essentially two main ways that small business owners pay themselves. Firstly a salary as an employee where thre are deductions for state and federal taxes which are paid over monthly. Other ways to pay yourself are through owners “draws” which you would not necessarily pay taxes on at the time of taking the draw, but at the assessment stage some time in the future. If you are taking draws, get a good accountant and accounting software so that you do not get any unwelcome surprises when payment time comes up.

Benefit of a Small Business 401K

You may have other retirement investments and manage your finances very well but there is always room to increase your retirement savings while you aim for your goal of retiring at 50. The main benefit of a 401K for small business owners is that it allows you to save more than any other form of retirement investment pre tax.

You are able to invest $19 500 (2020) into your 401K for small business or $26 000 if you are already over 50 years old.

Always remember to reduce or clear any debt/loans you may have like your mortgage. Use the mortgage calculator to see the huge amount you will save by making small increases to your mortgage repayments. By the time you retire, you do not want any debt, manage your debt well and live a stress free life.

Deductions for your 401K contributions within the prescribed limits are made pre-tax.

Contributions made as an employer are limited to 25% of compensation.

Eligibility Requirements

As the business owner you are required to select elegibility requirements for particpation and it is extremely important to make informed selections. We recommend that you consult with a tax practitioner or an investment advisory service who are experienced at establishing and applying for 401K for small business plans.

You are of course quite entitled to make the application and complete the documentation yourself, but it can be daunting, even though it has been reduced down for small businesses.

Selecting the wrong requirements may have quite drastic implications from a tax perspective both Federal and Stae Taxes.

This article on eligibility and requirements goes into far more depth and we would recommend that you read it.

Part of the Retire at Fifty Plan

To achieve anything of any significance it is essential to have a plan. At Retire at Fifty .com we want to help you achieve that Goal of having the option to Retire at Fifty.

By the time you turn 50 years old you want to

1. Own your home mortgage free

2. Have sufficient retirement savings in the form of 401K, IRA’s, cash, stocks etc to provide you an income that will sustain you.

3. Have no loans or debts

When your retirement investments provide sufficient income when invested to cover your living expenses with only a marginal or no reduction in the capital invested, you are in a good space and are officially able to choose wether or not to retire at 50.

This is true for retirement at any age.


save for retirement

More than 1/3 of Small Business owners have no retirement plan

Small business owners are the backbone of the economy and should be providing for their retirement. The last thing you want is to spend your life independent and then in retirement be dependent on the Government. Save all you can, as fast as you can and give yourself options.

Investing monthly for the long term is the best way to Save 

Many people become “experts at investing” after reading a few articles on the internet and listening to the enormous profits some have made in Bitcoin or other stock picks. The Markets are very complex and trying to call the way the market will move is not wise.


Of Americans stop working before 65 due to ill health. Are your finances able to sustain you should you fall ill and need to stop working?

If you missed the top 10 days of market performance in the 20 year period between 1999 and 2018, your return would have been halved as opposed to having stayed invested.

Putting money away for retirement every month is essential.

In order to retire at fifty, you need to be free of debt and have income producing assets/investments


Reduce debt aggressively


Invest for the long term


Don't panic if the markets go down, they will come back


Compound interest is your best friend


Take advise from a Tax practitioner


If it is too good to be true, it probably is!

Don’t be seduced by shemes that claim to offer returns that are way above normal good returns. Invest for the long term.