SBO 401(k) Plan Explained: 2025 Contribution Limits and Benefits for Small Business Owners

Julia Kagan is a seasoned financial journalist with expertise in personal finance and retirement planning.

What Is an SBO 401(k)?

An SBO 401(k), also known as an independent 401(k), is a tax-deferred retirement savings plan specifically designed for small business owners who employ only themselves and their spouses, with no other employees. This government-registered plan offers a powerful way to save for retirement while enjoying tax benefits.

Key Highlights

• Exclusive to small business owners and their spouses without additional employees.
• Tax-deferred contributions reduce current taxable income.
• For 2023, contribution limits are $22,500, increasing to $23,000 in 2024.
• Individuals aged 50 or older can contribute an extra $7,500 as catch-up contributions in both years.

Understanding the SBO 401(k) Advantage

This plan empowers self-employed small business owners to build retirement savings with flexibility. Contributions can be self-directed or professionally managed, allowing control over investment choices.

The SBO 401(k) shares similarities with SEP IRAs but often comes with lower setup and maintenance costs. It also permits loans against the plan balance, a feature not always available with other retirement accounts. However, it restricts hiring outside employees to maintain eligibility.

Types of SBO 401(k) Plans

There are two main versions: the Traditional and the Roth SBO 401(k). The Traditional plan allows you to contribute pre-tax dollars, deferring taxes until withdrawal. The Roth option uses after-tax dollars, enabling tax-free growth and withdrawals.

Many investors choose to split contributions between both types to diversify their tax strategies. Online financial calculators can assist in determining the best approach based on your circumstances.

Contribution Details for 2023 and 2024

• Employee Deferrals: Up to $22,500 in 2023 and $23,000 in 2024; $30,000 and $30,500 respectively for those 50 and older.
• Employer Contributions: Up to 25% of compensation in addition to employee deferrals.

The combined maximum contribution limit is $66,000 in 2023 and $69,000 in 2024, with an additional $7,500 catch-up contribution allowed for those aged 50 or above.

For unincorporated businesses, contributions are generally deductible on personal income taxes, while incorporated businesses can count contributions as business expenses.

One-Participant 401(k) Contribution Limits

The one-participant 401(k) plan follows the same contribution limits as the SBO 401(k), with $22,500 allowed in 2023 and $23,000 in 2024, plus catch-up contributions for those 50 and older.

Setting Up Your SBO 401(k)

Opening a one-participant or SBO 401(k) is straightforward and can be done online through brokerage firms. You'll need your Employer Identification Number (EIN), complete account setup forms, sign a plan adoption agreement, and choose your investments.

Can You Have Multiple 401(k) Plans?

Yes, it is possible to have more than one 401(k) plan, such as one through an employer and another through your own business. However, the IRS enforces combined annual contribution limits across all plans to ensure compliance.

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