1. Is the retirement plan just for you or for you and your employees?
2. Are you under 40 years of age?
2. Do you want to contribute a set annual amount to employees’ retirement?
Scenario A: It is just me or me and my spouse and I’m under 40
When you are younger and only considering retirement options for you and your spouse, there are several options to maximize the benefits you have from saving for a longer period of time than those starting their retirement when they are older.
1. Roth IRA: If you are earlier in your career, starting with a Roth IRA can be a great way to focus your retirement savings. Though the money you put in a Roth today is taxed this year, the compounded interest is not taxed – so all your gains over the years will be tax-free in retirement. You can contribute up to $7,000 ($8,000 if you are 50 or older) in 2025. If your spouse is working – in your business or any other – they can also contribute to their own Roth. If you are single or a head of household, you need to make less than $165,000 to participate (partial contributions may apply based on income limits). Taxpayers filing married, jointly can contribute if they are making less than $246,000 (partial contributions may apply based on income limits).
2. SEP IRA: If you want to contribute additional savings, you may want to add a SEP IRA. These plans are very easy and fast to set up and rarely have fees. Also, there are no annual filing requirements making it easy to manage. SEP IRA contributions are considered to be made by the business (not you individually) so these contributions are all allowable business expenses. The contribution limit differs based on the type of company you have:
For sole proprietors and owners of single member LLCs, you can contribute up to 25% of your net profit in 2025.
For S corporation owners and those with LLCs declared as S corporations, you can contribute up to 25% of your W-2 wages (not your owner’s draw or distribution).
Regardless, you cannot exceed total contributions of $70,000 in 2025.
3. Individual.Solo 401(k): If you want to be able to contribute more, an Individual or Solo 401(k) can be a good next choice. They may take a little more time to set up but they rarely have fees. What’s appealing about the Solo 401(k) is not only is it inexpensive and easy to implement, but you can also contribute as an employer and employee – creating the ability to save quickly if needed. For 2025, you can contribute as an employee up to $23,500, plus an additional 25% of compensation as the employer. All of these funds won’t be taxed in the year the contribution will be made, but you will be taxed in retirement.
If your spouse works with you, they can also participate in either the SEP IRA or Solo 401(k).
Scenario B: It is just me or me and my spouse and I’m 40 or older
As you get older, it makes more sense to maximize the deduction in the current year since you are making more money and there is less time until you retire for the accumulation of compound interest. For those over 40 without employees, we suggest flipping your strategy.
1. SEP IRA: Start with contributions to a SEP IRA – they are easy to set up, rarely have fees, and have no annual filing requirements. The SEP IRA only has employer-side contributions and they are limited to:
25% of your net profit in 2025 for sole proprietors and owners of single member LLCs.
25% of your W-2 wages (not your owner’s draw or distribution) for S corporation owners and those with LLCs declared as S corporations.
Regardless, you cannot exceed total contributions of $70,000 in 2025.
2. 401(k): If you want to contribute higher amounts of pre-tax income, look at an Individual or Solo 401(k). Solo 401(k)s are now much easier to have and the fees are low or none at all. They also have the potential for some of the largest contributions of any retirement plan – you can contribute as an employer and employee. For 2025, you can contribute as an employee up to $23,500 ($31,000 total if you are over 50, $34,750 if you are between the ages of 60-63). The contributions made now won’t be taxed, but you will be taxed in retirement. If your spouse works with you, they can also participate in your Solo 401(k).
3. Roth IRA: If you want to diversify your retirement savings or you have maxed out your Solo 401(k) contributions, you should consider a Roth IRA. Contributions are taxed this year, but all of the gains you have will be tax-free at retirement. You can contribute up to $7,000 ($8,000 if you are 50 or older) in 2025. If you are single or a head of household, you need to make less than $165,000 to participate (partial contributions may apply based on income limits). Taxpayers filing married, jointly can contribute if they are making less than $246,000 (partial contributions may apply based on income limits).
Scenario C: You want a set contribution level every year
If you want to provide the same contribution every year, there are two retirement plans that we recommend you consider.
1. Simple IRA: The first option to consider is a Simple IRA. They are low-cost and require no annual filings or other paperwork. Employees can make contributions directly from their payroll up to $16,500 in 2025 (employees over 50 can contribute an additional $3,500 more. Employees between the ages of 60-63 can make a $5,250 catch up contribution. The employee contributions are pre-tax, so they don’t pay tax now, but will when they withdraw the funds.
Employers must choose one of two options for their match:
2% nonelective contributions – this means that you must provide contributions for 2% of an employee’s salary whether they save any money themselves or not.
A one-for-one match between 1% and 3% of an employee’s salary. This means that you only contribute as the employee contributes up to the maximum. The match can only be 1% for two of every five years. For example, if you offered only 1% in the first two years you would have to match at a higher rate in the third year.
Here are examples of each option:
Erin opts for the 2% noneelective contributions. She has an employee who makes $45,760, so Erin will need to contribute $915.20 regardless of how much the employee contributes if anything at all.
Joanna decided to offer a 3% match. Her employee also makes $45,760. The employee contributes $2,288 each year (5% of her salary). Joanna will need to match the full amount up to the 3% ($1,372.80). If the employee made no contributions, Joanna would not contribute either.
You can change the amount you are contributing but you must notify employees 60 days ahead of time.
2. 401(k): If you want to contribute more as an employer or have vesting options (that is, you require employees to stay a certain amount of time in order to keep the employer retirement contributions) you should look at a 401(k) Plan. This is probably the best-known business retirement plan. Though it is versatile, it can take time and money to set up and maintain since annual filings and other documentation are typically required.
To their advantage, they offer:
Higher contribution limits – up to $23,500(with an additional $7,500 for employees over 50. Employees age 60-63 can make a catchup contribution of $11,250);
Higher employer contribution limits – depending on the plan you can contribute or match up to 100% of an employee's salary to a total of $70,000;
Greater versatility – for example, some plans allow you to make both pre- and post-tax contributions.
Scenario D: You don't want a set contribution annually
If you want to be able to vary the employer contribution you are making toward your employees’ retirement accounts, a good choice for you is a SEP IRA.
1. SEP IRA: The SEP is an easy-to-implement, inexpensive retirement plan, where you can contribute up to 25% of employees’ salary per year, up to $70,000. The SEP allows you to contribute any level up to 25% in a year or none at all. For example, Marta could provide employees with a contribution of 3% of their salary in 2022, none in 2023, 8% in 2024, and then 3% again in 2025.
Employees are vested in a SEP IRA from day one, so if they leave, they get all the contributions you made. Also, there’s no way for employees to do their own contributions – everything is provided by the employer only.
You've taken the first step toward securing your retirement!
At Civitas Strategies, we're dedicated to assisting child care business owners like you in making informed decisions about your financial future. We understand the significance of a well-prepared retirement plan, and we're here to guide you every step of the way.
What's Next?
Review Your Recommendations: Take some time to carefully review the retirement plan options we've provided based on your unique financial situation and goals.
Take Action: Implement your chosen retirement plan. The sooner you start, the brighter your retirement future will be.
If you ever have questions, need further assistance, or want to share your success story, don't hesitate to reach out to us at info@civstrat.com. Your feedback helps us improve our services and ensures that child care business owners everywhere can achieve their retirement dreams.
