You want to be financially successful. That is one of the primary reasons you started your own business. At the end of the year, you want to have something to show for all of your hard work. However, the temptation is for business owners to reinvest in the business instead of their future.
We say to ourselves, “I will save as soon as …” and there are always excuses to finish that sentence. But everyone should be setting aside something for emergencies and their retirement. We recommend saving 10% for emergencies and 15% for retirement, but something is always better than nothing. Start small if you must, but start today. Wealth is built by saving and investing so that your money can compound over long periods of time.
Additionally, as we talk about in “The Costly Effect Of Saving In A Taxable Account,” there is a great benefit to maximizing your contributions to every tax-advantaged account you can up to the annual contribution limit. This is why we recommend that business owners prioritize saving in a Roth IRA and 401(k) plan.
First, a Roth IRA
Your first goal should be to open a Roth IRA and fund it for the maximum annual contribution. For 2025, the maximum contribution is $7,000 ($8,000 if you are age 50 and over). Roth IRA accounts have several advantages.
Unlike a traditional IRA, you receive no tax deduction for funding a Roth, but, once funded, the value grows tax-free for the rest of your life. There are no required withdrawals on a Roth IRA, and there are no taxes owed when you do withdraw. Avoiding decades of taxation makes a Roth IRA significantly better than saving and investing in a taxable brokerage account.
Additionally, you can always withdraw whatever you contribute to a Roth IRA without tax or penalty. Contribute $10 today, and you can take your $10 basis out at any time regardless of your age, your Roth IRA’s age, or the reason for the distribution and owe no tax. This makes a Roth IRA a good place to save and invest your emergency fund.
Conversions, rollovers, and earnings however are all subject to a version of the five-year rule. Opening an account today and funding it with just a few dollars starts the clock on the account being open for 5 years, and you can avoid having to pay a 10% penalty if you distribute earnings before you turn 59 1/2.
In order to fund a Roth, you or your spouse must have earned income. You can fund your Roth up to the maximum contribution limit or the amount of your earned income. Children who earn a few hundred dollars can fund their Roth. And a spouse’s earned income can qualify a spouse with no income to fund their own Roth.
A Roth IRA should be everyone’s first priority.
Second, an Individual 401(k) Retirement plan
When you work for yourself and you are the only employee, you are allowed to open an individual retirement plan such as an individual 401(k) plan also known as a solo-401(k). Solo-401(k) plans are generally better than SEP IRAs, which tempt many business owners.
An individual 401(k) plan is very simple. Since you (or you and your spouse) are the only employee(s), this reduces the complexity of the plan and minimizes the cost of overhead.
That being said, if you have not yet maximized your Roth IRA annual contribution limits, do that first. Once those are maximized, consider opening an individual employer retirement plan.
In 2025, you are allowed to contribute $23,500 to an individual retirement plan as deferred wages ($31,000 if you are age 50 or over and $35,750 if you are between ages 60 and 63). Additionally, you are allowed to contribute an additional amount limited by your business income and up to $46,500 for 2025. These limits allow many solo business owners to contribute at least $23,500 and up to $70,000 (or $77,500 if they are age 50 or over and $82,250 if they are between 60 and 63).
Additionally, if you have a custodian who allows it, you are allowed to designate your contributions be made to the Roth portion of the retirement plan.
Why? Tax-Free Investment Growth!
Small business owners trying to save and invest in a taxable brokerage account are subject to annual taxation on dividends, interest, and capital gains. This tax headwind has an enormous effect over decades of taxation. Meanwhile, investments growing in Roth accounts are like the friction-less vacuum we all studied in high school physics. Growth continues unimpeded for your entire lifetime.
If you have a large taxable account, we recommend that you fund your retirement accounts for more than you would otherwise budget. When this means deferring wages to your 401(k), you can withdraw from your taxable account to supplement your lifestyle. This process undoes several years of failing to invest in tax sheltered accounts. We call this “funding your retirement accounts even when you can’t afford it.”
The more money you can save in Roth accounts the better.
With these two savings vehicles, in 2025 you are able to save $77,000 in Roth accounts (or $85,500 if you are age 50 or over and $90,250 if you are between 60 and 63).
The ability to save so much in tax-free investment accounts is especially attractive for small business owners who are trying to save and invest enough to be financially independent and retire early.
Photo by Liz Sanchez-Vegas on Unsplash. Image has been cropped.
