Can an LLC Really Create a Simple Retirement Plan? – Yes, But Avoid This Mistake + FAQs

Without a built-in 401(k) from a big employer, saving for the future can feel daunting. You’re not alone—about 60% of small business owners say they aren’t on track to save enough for retirement.

Can an LLC Create a Retirement Plan?

Yes. An LLC can absolutely create a retirement plan for its owners and employees. Being a small business doesn’t mean giving up on retirement benefits.

Whether you’re a one-person LLC or you have a team, you have access to many of the same retirement savings options as big companies. From Simplified Employee Pension (SEP) IRAs to Savings Incentive Match Plan for Employees (SIMPLE) IRAs and even 401(k) plans, LLC owners can set up accounts that help everyone save on taxes while building wealth for the future.

In short, your LLC can serve as the platform to offer tax-advantaged retirement savings—no giant corporation needed.

Avoid These Mistakes When Setting Up Your LLC’s Retirement Plan

Even with the best intentions, it’s easy to stumble when creating a retirement plan. Avoiding common pitfalls will save you headaches and money. Here are some mistakes to steer clear of:

• Choosing the Wrong Plan: Not every retirement plan fits every LLC. For example, a Solo 401(k) won’t work if you have employees, and a SIMPLE IRA isn’t available if you have over 100 employees. Pick a plan that matches your business size and needs.
• Ignoring Employee Eligibility: Some business owners try to exclude part-time or newer employees incorrectly. Federal law requires that if you offer a plan, most long-term employees above certain age or service thresholds must be allowed to participate. Skipping eligible workers can lead to legal trouble.
• Overlooking Costs and Fees: All plans have administrative or investment fees. Don’t just sign up blindly—compare providers. High fees can eat into everyone’s savings. Choose low-cost plan providers and keep an eye on expense ratios for investments.
• Missing Contribution Deadlines: If your LLC’s plan involves employee salary deferrals or employer matches, deposit those funds on time. Late deposits (especially for 401(k) or SIMPLE IRA contributions) can incur penalties and even IRS excise taxes.
• Neglecting Required Paperwork: Even “simple” plans have some paperwork. For instance, a SIMPLE IRA requires an annual notice to employees, and a Solo 401(k) might require a Form 5500 filing once the balance grows large. Stay on top of the documentation to keep your plan compliant.
• Forgetting State Mandates: Some states now mandate employers offer a retirement program or join a state-run plan. Don’t ignore your state’s requirements—failing to comply could mean fines. If your LLC is in such a state, setting up your own plan will usually satisfy the mandate.

Top Retirement Plan Options for LLCs

LLC owners have several excellent retirement plan choices. The best option depends on your business’s size, whether you have employees, and how much you want to contribute each year. Here are three of the most popular and simple plans for LLCs:

SIMPLE IRA – Easy, Low-Cost Plan for Small LLCs

A SIMPLE IRA is true to its name: simple to set up and maintain. It’s designed for small businesses (LLCs with 100 or fewer employees) and is an attractive choice if you want employees to save too. With a SIMPLE IRA, your employees can contribute a portion of their salary to an IRA, and your LLC adds a modest contribution on top. Here’s how it works:

• Employee Contributions: Employees (including you as the owner-employee) can defer part of their paycheck into the plan each year (up to $16,000 in 2024, with slightly higher limits annually). This money goes into their individual retirement accounts.
• Employer Match or Contribution: Your LLC must either match employees’ contributions dollar-for-dollar up to 3% of their salary or give a fixed 2% contribution to all eligible employees, even if they don’t contribute themselves. This is a requirement, but it’s a relatively small commitment that helps employees build savings.
• Low Administration: Setup is straightforward—often just filling out a form with a financial institution—and there are no annual IRS filings for the employer. Employees immediately own (are vested in) all the money in their SIMPLE IRAs.
• Things to Note: You generally cannot have any other retirement plan in the same year as a SIMPLE IRA. Also, if an employee withdraws money within the first two years of participation, they face a hefty 25% penalty (encouraging them to keep it saved for retirement).

A SIMPLE IRA is great for an LLC that wants an easy, low-cost way to help the team save, without dealing with complex testing or high administration fees. It encourages a savings habit among employees and shows you care about their future.

SEP IRA – Simplified Pension Plan for Self-Employed LLCs

The SEP IRA (Simplified Employee Pension) is a favorite among solo entrepreneurs and small family-run LLCs. It’s basically an employer-funded IRA. In a SEP, only the employer (your LLC) contributes to the plan, but those contributions can be much larger than with a SIMPLE IRA. Here’s the scoop:

• High Contribution Limits: With a SEP, your LLC can contribute up to 25% of an employee’s compensation to their SEP IRA each year, up to a maximum cap (around $66,000 for the owner in 2023, with limits adjusting annually). This means you as the owner can potentially put away a lot more money in good years compared to a SIMPLE IRA.
• Employer-Only Contributions: Employees do not contribute from their paychecks. Instead, the company contributes on their behalf. If you’re a one-person LLC, that just means you contribute to your own SEP IRA. If you have employees, whatever percentage of salary you contribute for yourself must be the same for them. For example, if you decide to contribute 10% of your own compensation, you must also contribute 10% of each eligible employee’s compensation to their SEP accounts.
• Ultra Easy Administration: SEP IRAs are arguably the easiest to maintain. You generally just sign an agreement (often IRS Form 5305-SEP or similar through your financial institution) and set up IRAs for each eligible worker. No annual filings, no complex paperwork. You can decide each year how much to contribute (or even nothing, if it’s a tight year), giving you flexibility.
• Who It’s Best For: A SEP IRA shines for LLC owners who have no full-time employees (or maybe just a spouse) and want to maximize their own retirement savings with minimal fuss. It’s also used by those who have a few employees and want to reward them with contributions, but note that it can become expensive for the employer if you have many staff since you’re footing the entire retirement bill.

In short, the SEP IRA lets your LLC stash a lot of cash for retirement in prosperous years while keeping paperwork to a minimum. It’s a terrific option for high-earning consultants, freelancers, or small family businesses under an LLC structure.

Solo 401(k) – Full-Featured 401(k) Plan for a One-Person LLC

If your LLC has no employees other than you (and perhaps a spouse), the Solo 401(k) is a powerhouse option. Also known as an individual 401(k) or one-participant 401(k), it offers the same benefits as a big company’s 401(k) but tailored for a business of one. Key features include:

• Dual Contributions: You wear two hats in a Solo 401(k) – as an employee and as the employer. This means you can contribute in two ways. First, you can defer a chunk of your own earnings (like an employee contributing to a 401(k) – up to $22,500 in 2023, with limits rising slightly each year). Second, your LLC can contribute up to 25% of your compensation as a profit-sharing contribution. Combined, these can potentially reach the annual maximum allowed (around $66,000 in 2023, higher if you’re over 50 and making catch-up contributions).
• Roth Option and Loans: Many Solo 401(k) providers let you choose Roth contributions for your employee portion (pay tax now, enjoy tax-free growth) or take a loan from your 401(k) balance if needed, just like a regular employer 401(k) plan. This flexibility sets it apart from SEP and SIMPLE IRAs, which don’t offer loans or Roth accounts under traditional rules.
• Administrative Duties: Setting up a Solo 401(k) is still quite manageable. You’ll need to sign adoption documents (often provided by brokerage firms or plan providers). There’s typically no annual IRS filing required until your plan assets exceed $250,000, at which point you file a short Form 5500-EZ. This plan is slightly more paperwork than an IRA-based plan, but it’s not too burdensome for most solo business owners.
• Huge Savings Potential: The big draw is how much you can save, especially at moderate income levels. For instance, if your single-member LLC earns $50,000 in profit, a Solo 401(k) would let you contribute a lot more of that toward retirement than a SEP IRA would, because of the employee deferral portion. This can make a massive difference in long-term savings.

A Solo 401(k) is perfect for the solopreneur or consultant who wants to turbocharge retirement savings. It gives you the full menu of 401(k) features and high contribution limits, without needing a Fortune 500 company behind you. Just remember, if you do hire non-family employees down the road, you’ll have to convert this to a regular 401(k) plan to include them (or choose a different plan at that time).

Key Players and Terms in LLC Retirement Planning

To fully understand LLC retirement plans, it helps to know the key players and concepts involved. Here are some important terms and organizations you’ll encounter:

• Internal Revenue Service (IRS): The IRS sets the tax rules for retirement plans. They determine contribution limits, what’s tax-deductible, and how plans are structured. Your LLC’s plan must comply with IRS regulations to get those tax benefits.
• Department of Labor (DOL): The DOL, through laws like ERISA, oversees retirement plan management and protects employees. They ensure that if you offer a plan to employees, you manage it responsibly and fairly.
• Employee Retirement Income Security Act (ERISA): A federal law that governs most retirement plans in private companies. ERISA sets standards to protect participants – for example, it requires nondiscrimination (you can’t favor owners over employees unfairly) and ensures plan funds are handled prudently. Note: Owner-only plans (like a Solo 401(k) with just you) are generally not subject to some ERISA requirements, making them easier to administer.
• Limited Liability Company (LLC): Your business structure. Being an LLC doesn’t limit your retirement plan choices – LLCs can sponsor IRAs or 401(k)s just like any other business entity. However, your LLC’s tax status (sole proprietorship, S-corp, etc.) might affect how contributions are calculated.
• Plan Administrator: The person or entity responsible for running the plan. In a small LLC’s case, this might be you or someone you appoint. The administrator makes sure contributions are handled correctly, plan rules are followed, and required notices are given. Many LLCs use a financial institution or brokerage’s prototype plan document, where the institution handles much of the administration behind the scenes.
• Fiduciary Duty: If you offer a retirement plan to employees, you take on a fiduciary duty – a legal responsibility to act in the best interest of participants. That means you should choose reasonable investment options, keep fees low, and monitor the plan’s health. For owner-only plans, this is less of a concern, but it’s crucial when you have others in the plan.
• State-Sponsored Retirement Programs: Some states (like California, Illinois, and Oregon) now have programs requiring employers without a private plan to enroll employees in a state-run IRA program. Names like CalSavers (CA) or OregonSaves (OR) might pop up. These aren’t traditional pension plans but automatic Roth IRAs. If your LLC already offers its own retirement plan (like a SEP, SIMPLE, or 401(k)), you typically don’t have to participate in the state program.
• Secure Act Tax Credits: Recent federal legislation (the SECURE Act 2.0) boosted tax credits for small businesses starting new retirement plans. For instance, your LLC may get a tax credit covering 100% of plan startup costs (up to $5,000 per year for three years) and even an additional credit for contributing to employees’ accounts. This is essentially free money to encourage small companies to establish retirement plans, helping offset any initial expenses.

LLC Retirement Plans in Action: Real-Life Examples

Sometimes it helps to see how all this works in practice. Here are a few hypothetical examples showing how different LLCs might approach retirement planning:

Example 1: One-Person LLC Maximizing a Solo 401(k)

Situation: Maria is a freelance graphic designer who set up her business as an LLC. She has no employees, and her LLC’s net income is about $80,000 a year. Maria wants to save aggressively for retirement and reduce her taxable income.

Plan Choice: Maria opens a Solo 401(k) for her LLC. As the sole participant, she can contribute both as employee and employer. Suppose she pays herself $80,000 (either as self-employment income or W-2 wages if her LLC is an S-corp). She defers $19,000 of that into her 401(k) (just under the limit for someone under 50) and then her LLC contributes an additional 25% of her remaining earnings—about $15,250—as an employer profit-sharing contribution. In total, she’s putting away over $34,000 for retirement this year, far more than she could with just an IRA.

Outcome: Maria drastically lowers her taxable income through these contributions. Her Solo 401(k) was easy to set up through an online broker, and because her balance is under $250,000, she has no special filing requirements yet. She appreciates having a high savings rate and even has the option to take a loan from her 401(k) if an emergency arises.

Example 2: Small LLC with Employees Opts for a SIMPLE IRA

Situation: Green & Co. is a small landscaping LLC with 5 full-time employees. The owner, Daniel, wants to offer a retirement benefit to attract and keep his workers, but he can’t afford a pricey 401(k) plan administration.

Plan Choice: Daniel chooses a SIMPLE IRA for his LLC. He signs up with a low-cost financial institution that handles the paperwork. Each of his employees decides to contribute a part of their paycheck to the plan. One employee might put in 5%, another 2%, and so on, up to the annual SIMPLE IRA limit. Daniel’s LLC then matches each employee’s contribution dollar-for-dollar up to 3% of their salary. For an employee earning $40,000 who contributes 3% ($1,200), the company adds another $1,200 to that person’s retirement account.

Outcome: All 5 employees now have IRAs growing with both their contributions and the company’s matching dollars. Daniel’s team is happy to have a retirement plan, and it improves morale and loyalty. The cost to the LLC is manageable and predictable (just a small percentage of payroll), and Daniel also contributes for himself through the SIMPLE IRA. Plus, by offering his own plan, Daniel’s business complies with his state’s new auto-IRA mandate, so he avoids any penalties or having to use the state program.

Example 3: Family Business Chooses a SEP IRA for Flexibility

Situation: Thompson Consulting LLC is a family-run business with two owners: a married couple, Jack and Lisa. They have one part-time assistant. Business income fluctuates significantly each year depending on contracts. Some years they have high profits, other years are lean. They want a retirement plan that lets them adjust contributions annually based on business performance.

Plan Choice: The Thompsons decide on a SEP IRA. It’s perfect for their situation – extremely easy to manage and very flexible. In a great year, their LLC can contribute the maximum 25% of compensation for each of them, allowing a big chunk of money to go into their SEP IRAs (potentially tens of thousands of dollars sheltered from tax). In a lean year, they can choose to contribute a smaller percentage or nothing at all, without any penalties or required amounts. Their part-time assistant has not yet met the SEP eligibility criteria (she’s new and has only worked part-time for a year), but once she does, the Thompsons know they’ll need to contribute the same percentage for her as well.

Outcome: With the SEP IRA, Jack and Lisa get full control over how much their business saves for retirement each year. They keep paperwork minimal—just sending contributions to their SEP accounts via their brokerage. In booming years, they boost their retirement savings significantly and slash their tax bill. In slow years, they conserve cash by pausing contributions. This flexibility helps their LLC’s finances while still building their nest egg over time.

SIMPLE IRA vs. SEP IRA vs. Solo 401(k): Comparison Table

Below is a quick comparison of three common retirement plan options for LLCs. This highlights the key differences to help you decide which might suit your business best:

Federal vs State-Level Considerations for LLC Retirement Plans

Setting up a retirement plan means navigating both federal and state rules. Here’s what LLC owners should keep in mind:

Federal Law and Regulations: Most retirement plans are governed by federal rules. The IRS provides tax advantages—contributions are generally tax-deductible for your LLC (or pre-tax for employees) and investments grow tax-deferred. Federal limits determine how much you can put in each year. Plans like SEP IRAs, SIMPLE IRAs, and 401(k)s must also follow federal laws like ERISA if they cover employees, ensuring fairness and security of the funds. For example, ERISA requires that you cover employees who meet certain criteria (like working a year or more and over age 21) and that you don’t discriminate in favor of owners or highly paid staff when it comes to benefits. The upside of federal law: it also provides strong protection for retirement assets from creditors and encourages plan adoption through tax credits. As of recent laws (SECURE Act 2.0), small businesses can even get significant tax credits to offset the costs of starting a new plan, making it financially easier to launch one.

State Law and Mandates: While federal law primarily governs how retirement plans operate, states are increasingly stepping in to address the retirement savings gap. Several states have implemented mandatory retirement plan programs that affect LLCs with employees. If your LLC doesn’t offer a retirement plan and you have over a certain number of employees, your state might require you to enroll your workers in a state-sponsored IRA program. For example, California’s CalSavers and OregonSaves mandate enrollment for businesses of a certain size that lack their own plan. The good news is that if you set up an LLC retirement plan like the ones we discussed, you usually won’t need to join the state program—you’re already complying by providing a private plan. Beyond mandates, consider state tax implications too: in most states, contributions to these plans are tax-deductible at the state level just like on your federal return, but a few states without income tax or different rules could have variations. Also, each state has its own rules on protecting retirement assets from creditors, though generally 401(k) and IRA assets get a high level of protection everywhere.

Check both the IRS rules and your state’s laws when creating a retirement plan. Federal law will guide the plan’s setup, contributions, and tax perks, while state law might add an extra layer of requirements if you have employees. Staying compliant with both will ensure your LLC’s retirement plan runs smoothly and keeps both you and your team on track for a secure retirement.

Frequently Asked Questions (FAQs)

Can a single-member LLC have a retirement plan? Yes. A single-member LLC can set up plans like a Solo 401(k) or SEP IRA. The IRS treats you as both employer and employee, so you can save for retirement through your business.

Do LLC owners count as employees in a retirement plan? No. LLC owners are generally considered self-employed, not employees. However, they can still participate in the company’s retirement plan as an owner, making contributions just like an employee would.

Are contributions to an LLC retirement plan tax-deductible? Yes. Contributions your LLC makes to a retirement plan are usually tax-deductible business expenses. Employee deferrals (including your own, if you’re the owner) are pre-tax, lowering taxable income.

Does an LLC have to offer a retirement plan to its employees? No. There’s no federal requirement for an LLC to offer a retirement plan. Some states, though, require businesses of a certain size to provide access to a plan or join a state program.

Is a Solo 401(k) better than a SEP IRA for an LLC owner? Yes, if maximizing contributions at lower income levels is the goal. A Solo 401(k) often lets you save more per year. However, it involves slightly more paperwork than a SEP IRA.

Can an LLC have a SIMPLE IRA and a 401(k) in the same year? No. If your LLC adopts a SIMPLE IRA, you generally cannot maintain another retirement plan simultaneously that year. SIMPLE IRAs have an exclusive plan rule to keep things, well, simple.

Are there tax credits for starting an LLC retirement plan? Yes. Small businesses qualify for federal tax credits (up to $5,000 per year for three years) to offset startup costs. Recent laws also added credits for employer contributions to encourage small-business retirement plans.

Can I contribute to a personal IRA if I have an LLC retirement plan? Yes. Having an LLC plan doesn’t stop you from contributing to a personal IRA (Roth or traditional). Just note: participating in a workplace plan can affect whether your traditional IRA contributions are deductible.