S corp retirement plan options give business owners powerful ways to save for the future while lowering current tax liability. Choosing the right plan depends on income, number of employees, and how much complexity you’re willing to manage. This guide breaks down the best retirement plan options for S-corp owners and shows you how to select the smartest fit.
Key Takeaways
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S corporations can legally sponsor several retirement plans, from simple IRAs to advanced pension plans.
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The best retirement plan for S-corp owners depends on employee count, income, and contribution goals.
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Solo 401(k)s and SEP IRAs work best for owner-only S corps.
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Traditional 401(k)s offer flexibility for growing teams.
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Defined benefit plans allow the largest contributions but require long-term commitment.
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Retirement plans reduce taxable income while building long-term wealth.
What Are S Corp Retirement Plan Options?
S corp retirement plan options are IRS-approved savings plans that allow S corporations to help owners and employees prepare for retirement. These plans also provide meaningful tax advantages for the business.
How Retirement Plans Work for S Corps
Unlike sole proprietors, S-corp owners must pay themselves a reasonable salary. Retirement contributions are calculated using W-2 wages, not distributions. This structure makes planning especially important.
Why Structure Matters
Your employee count, payroll size, and profitability directly affect which retirement plans for S corps are allowed and cost-effective.
Why Do S Corp Retirement Plan Options Matter?
Retirement plans are one of the most effective tax strategies available to S-corp owners. They reduce current taxable income while creating long-term financial security.
Tax Efficiency
Employer contributions are generally tax-deductible. Employee contributions reduce taxable wages. According to the IRS, qualified retirement plans are one of the primary tools Congress created to encourage business owners to save for retirement.
Talent Retention
Offering retirement benefits helps small companies compete for skilled employees, especially as your business grows.
How Do You Choose the Best Retirement Plan for an S Corp?
Choosing among s corp retirement plans starts with understanding your business structure.
Step 1: Count Employees
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Owner only or spouse only
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Small team (1–100 employees)
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Growing or established workforce
Step 2: Define Contribution Goals
Do you want simplicity or maximum contributions? Some plans cap savings well below others.
Step 3: Match Complexity Tolerance
Some plans require almost no administration. Others require annual testing, filings, or actuarial reviews.
What Are the Main Types of S Corp Retirement Plans?
SEP IRA (Simplified Employee Pension)
A SEP IRA works best for S-corp owners with no employees other than a spouse.
Contributions:
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Employer only
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Up to 25% of compensation
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Maximum $70,000 for 2025
Pros:
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Extremely easy to set up
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Minimal paperwork
Cons:
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No Roth option
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Same contribution percentage required for all eligible employees
Solo 401(k) (Individual 401(k))
The Solo 401(k) is often the best retirement plan for S-corp owners with no employees.
Contributions:
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Employee salary deferrals + employer contributions
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Up to $70,000 in 2025 (plus catch-up if 50+)
Pros:
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Roth option available
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Higher contribution potential than SEP IRAs
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Loan feature allowed
Cons:
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Slightly more administration
SIMPLE IRA
Designed for businesses with 100 or fewer employees, SIMPLE IRAs balance ease and affordability.
Contributions:
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Employee deferrals
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Employer must match up to 3% or contribute 2%
Pros:
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Low setup cost
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Easy to maintain
Cons:
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Lower contribution limits
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Inflexible employer rules
Traditional 401(k)
Traditional 401(k)s are ideal for established S corps with multiple employees.
Pros:
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Highest flexibility
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Pre-tax and Roth options
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Custom eligibility and vesting schedules
Cons:
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Higher administrative costs
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Requires compliance testing
Defined Benefit Plan
A defined benefit plan is best for high-income S-corp owners seeking maximum contributions.
Pros:
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Contributions can exceed $100,000 annually
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Predictable retirement income
Cons:
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Expensive to administer
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Requires annual actuarial certification
Which S Corp Retirement Plan Fits Your Situation?
| Business Scenario | Recommended Plan |
|---|---|
| Owner only or spouse only | SEP IRA or Solo 401(k) |
| 1–100 employees, simple setup | SIMPLE IRA |
| Growing, profitable company | Traditional 401(k) |
| High income, max savings goal | Defined Benefit Plan |
This comparison helps narrow down the most practical small company retirement plan options.
What Mistakes Should S Corp Owners Avoid?
Using Distributions Instead of Salary
Retirement contributions are based on W-2 wages, not owner distributions.
Ignoring Employee Costs
Plans like SEP IRAs require equal percentage contributions for all eligible employees, which can become expensive.
Delaying Setup
Most plans must be established before year-end to count for that tax year.
What Are the Long-Term Benefits of S Corp Retirement Plans?
S corp retirement plan options support both business growth and personal wealth.
Compounding Growth
Tax-advantaged contributions grow faster over time than taxable investments.
Exit and Succession Planning
Strong retirement plans improve business valuation and make ownership transitions smoother.
Conclusion + Next Steps
S corp retirement plan options are more than benefits—they’re strategic tools for tax reduction, wealth building, and business stability. The right plan depends on your payroll structure, employee count, and long-term goals. A qualified tax or retirement professional can help tailor the best solution for your S corp.
FAQs
Can an S Corp set up a retirement plan?
Yes. S corporations can legally sponsor several retirement plans, including IRAs, 401(k)s, and defined benefit plans.
What is the $1000 a month rule for retirement?
It’s a general savings guideline suggesting consistent monthly retirement contributions, not an IRS rule.
What is the 5 year rule for S Corp?
It commonly refers to holding periods for tax strategies, including certain built-in gains or retirement distributions.
How can I legally reduce my income with a S corporation?
You can reduce taxable income through retirement contributions, reasonable salaries, and deductible business expenses.
What is the 2% rule for S Corp?
Owners with more than 2% ownership must report certain fringe benefits as taxable income.
What is the $2500 expense rule?
It refers to the IRS de minimis safe harbor allowing businesses to deduct qualifying expenses under $2,500 without capitalization.
