What is the best retirement plan for a small business owner? If you are self-employed or own a business in Hawaiʻi, you have several ways to save for retirement while potentially reducing your taxes.
Unlike employees of larger companies, small business owners often don’t have an employer-sponsored retirement plan waiting for them. The good news is that options such as a Roth IRA, traditional IRA and Solo 401(k) can help you build retirement savings — and some offer significant tax advantages.
Hawaiʻi is also launching the Hawaiʻi Retirement Savings Program, which will affect many businesses that don’t currently offer employees a retirement plan.
Here’s an overview of the major options and how they compare.
Important: This article provides general educational information, not individualized financial, investment, legal or tax advice. Consult with a qualified financial or tax professional about the best strategy for your situation.
Roth IRA: Pay Taxes Now, Potentially Withdraw Tax-Free Later
A Roth IRA can be one of the simplest ways for a small business owner or self-employed individual to begin saving for retirement.
You contribute money that has already been taxed. You don’t receive an income-tax deduction for the contribution, but your investments can grow tax-free and qualified withdrawals during retirement are generally tax-free.
2026 Roth IRA Contribution Limits
For 2026, you can contribute up to:
- $7,500 if you are under age 50
- $8,600 if you are age 50 or older
These limits apply to your combined contributions to Roth and traditional IRAs, not to each account separately.
Roth IRAs also have income eligibility limits.
Who Might Consider a Roth IRA?
A Roth IRA may be worth considering if you:
- Are younger and have many years for your investments to grow.
- Are currently in a relatively low tax bracket.
- Believe you may be in a higher tax bracket later in life.
- Want to build a source of potentially tax-free retirement income.
Potential advantage: You pay taxes today in exchange for the opportunity for decades of tax-free investment growth.
Traditional IRA: Potential Tax Savings Today
A traditional IRA takes a different approach.
Depending on your income and whether you or your spouse participate in a workplace retirement plan, your contributions may be tax deductible. Your investments then grow tax-deferred, and you generally pay income taxes when the money is withdrawn.
2026 Traditional IRA Contribution Limits
The combined Roth and traditional IRA contribution limit for 2026 is:
- $7,500 if you are under age 50
- $8,600 if you are age 50 or older
Being eligible to contribute to a traditional IRA does not necessarily mean the entire contribution is tax deductible. Your deduction can depend on your income, filing status and participation in another retirement plan.
Who Might Consider a Traditional IRA?
A traditional IRA may be attractive if you:
- Want a potential income-tax deduction today.
- Expect to be in a lower tax bracket in retirement.
- Want a relatively simple retirement account without establishing a retirement plan through your business.
Solo 401(k): A Powerful Option for Self-Employed Business Owners
For many profitable self-employed people and small business owners, a Solo 401(k) deserves special consideration.
Also known as an Individual 401(k), Self-Employed 401(k) or One-Participant 401(k), this type of plan is generally intended for a business owner with no employees other than the owner and the owner’s spouse.
Why is it attractive? The owner can contribute to the plan in two capacities: as both an employee and employer.
(reference: https://www.irs.gov/retirement-plans/one-participant-401k-plans)
2026 Solo 401(k) Contribution Limits
For 2026, the employee 401(k) contribution limit is:
- $24,500 for people under age 50
- An additional $8,000 catch-up contribution is generally available beginning at age 50
- People ages 60–63 may qualify for a higher $11,250 catch-up contribution
Employer contributions can potentially increase total contributions to as much as $72,000 in 2026, before eligible catch-up contributions.
The amount you can actually contribute depends on your business structure, compensation, self-employment income and other factors.
Who Might Consider a Solo 401(k)?
A Solo 401(k) may be particularly attractive if you:
- Are self-employed.
- Own a business with no employees other than your spouse.
- Earn enough to save substantially more than the annual IRA limit.
- Want to reduce current taxable income through eligible pre-tax contributions.
- Want greater retirement-saving capacity as your business becomes more profitable.
For a profitable self-employed business owner, the difference between an IRA’s $7,500 annual limit and the much higher potential contribution available through a Solo 401(k) can be significant.
If your business has employees, however, a Solo 401(k) generally isn’t an option. You may instead want to investigate a regular 401(k), SIMPLE IRA, SEP IRA or another small-business retirement plan.
Hawaiʻi Retirement Savings Program: What Employers Should Know
Hawaiʻi is preparing to launch the Hawaiʻi Retirement Savings Program (HRSP), currently projected to begin in late December 2026.
This new state-facilitated retirement program is designed to help private-sector employees who don’t have access to a retirement plan through their employer.
How Does the Hawaiʻi Retirement Savings Program Work?
The program uses a payroll-deduction Roth IRA.
Eligible employees will be automatically enrolled but may opt out. The program’s default employee contribution is currently set at 5% of wages, although employees can change their contribution rate.
Employers do not contribute money to employees’ HRSP accounts. Instead, participating employers facilitate the program by handling required enrollment information and payroll deductions.
Hawaiʻi private-sector employers with at least one employee will generally need to either:
- Facilitate the Hawaiʻi Retirement Savings Program;
- Offer employees a qualifying employer-sponsored retirement plan, such as a 401(k); or
- Offer a qualifying Pooled Employer Plan (PEP).
Businesses that already offer a qualifying retirement plan are generally exempt from participating in HRSP.
Because implementation details and deadlines may change as the program launches, Hawaiʻi employers should check the Hawaiʻi Department of Labor and Industrial Relations’ Hawaiʻi Retirement Savings Program website for current requirements.
Comparing Retirement Savings Options for Small Business Owners
| Feature | Roth IRA | Traditional IRA | Solo 401(k) | Hawaiʻi HRSP | Taxable Investments |
|---|---|---|---|---|---|
| 2026 contribution limit | $7,500 combined IRA limit | $7,500 combined IRA limit | $24,500 employee contribution; potentially up to $72,000 total* | Federal Roth IRA limits | No retirement-plan limit |
| Age 50+ catch-up | +$1,100 | +$1,100 | Generally +$8,000* | +$1,100 | N/A |
| Potential tax deduction today? | No | Yes, depending on eligibility | Yes, for eligible pre-tax contributions | No | No |
| Potential tax-free retirement withdrawals? | Yes | No | Depends on Roth vs. traditional contributions | Yes | No special retirement treatment |
| Income restrictions | Yes | Deduction restrictions may apply | Based partly on compensation/income | Roth IRA rules apply | No |
| Employer involvement | None | None | Business establishes plan | Employer facilitates payroll deduction | None |
| Good fit for | Long-term tax-free growth | Potential current tax deduction | Self-employed owners wanting to save more | Employees without a workplace plan | Flexible investing outside retirement accounts |
*Additional rules apply. Contribution limits can vary based on age, income, compensation, business structure and other retirement-plan contributions.
What About Investing in ETFs and Index Funds?
A retirement account and an investment are not the same thing.
An IRA or 401(k) is an account, while investments such as index funds, mutual funds and exchange-traded funds (ETFs) are assets you may hold inside that account.
You can also invest in ETFs, index funds and other securities through a regular taxable brokerage account.
A taxable investment account doesn’t provide the same retirement-specific tax advantages as an IRA or 401(k), but it offers considerably more flexibility. There is generally no annual contribution limit and your money isn’t subject to retirement-account withdrawal rules.
Dividends, interest and realized investment gains may be taxable.
For some small business owners, taxable investments can complement rather than replace an IRA, 401(k) or other retirement plan.
Which Retirement Plan Is Best for a Small Business Owner?
There is no single best retirement account for everyone.
A younger business owner with decades before retirement may value the long-term tax-free growth potential of a Roth IRA.
A higher-income business owner may place greater value on retirement contributions that potentially reduce taxable income today.
A profitable self-employed owner with no employees may benefit from the substantially higher contribution limits available through a Solo 401(k).
And many business owners use more than one account, combining tax-advantaged retirement savings with taxable investments.
Your income, age, tax bracket, business structure, employees and retirement goals can all affect which strategy makes the most sense.
Where Can Small Business Owners Go for Help?
Your CPA or tax professional is a good place to start. They can help you understand how different retirement-plan contributions could affect your current taxes.
You may also want to consult a qualified financial advisor who can help you establish retirement goals, determine how much to save and develop an investment strategy.
When selecting a financial advisor, ask:
- Are you acting as a fiduciary when advising me?
- How are you compensated?
- What fees will I pay?
- Do you receive commissions or other compensation for recommending particular products?
- Do you regularly work with small business owners and self-employed clients?
Understanding both an advisor’s fiduciary obligations and compensation structure can help you identify potential conflicts of interest.
Where to Learn More About Solo 401(k) Plans
Several major financial-services companies offer retirement accounts designed for self-employed business owners. Examples include:
Fidelity — Self-Employed 401(k)
https://www.fidelity.com/retirement-ira/small-business/self-employed-401k/overview
E*TRADE from Morgan Stanley — Individual 401(k)
https://us.etrade.com/what-we-offer/our-accounts/individual-401k
ShareBuilder 401k — Solo 401(k)
https://www.sharebuilder401k.com/
These companies are provided as examples for research purposes and are not endorsements by Hawaiʻi SBDC. Compare fees, investment options, Roth features, administrative requirements and other plan features before choosing a provider.
For authoritative information on retirement plans and current contribution limits, visit the IRS Retirement Plans website. (https://www.irs.gov/retirement-plans/retirement-plans-for-small-entities-and-self-employed)
Start Building Your Retirement Nest Egg
Owning a successful business can be an important part of building long-term wealth, but your business doesn’t have to be your entire retirement plan.
Setting aside money consistently allows you to build financial assets outside your business while taking advantage of the potential tax benefits available through retirement accounts.
You don’t necessarily need to start with a large contribution. The important step is to understand your options, choose a strategy appropriate for your circumstances and begin investing consistently.
Need Help With Your Small Business?
Hawaiʻi SBDC provides confidential, one-on-one business advising at no cost to Hawaiʻi entrepreneurs and small business owners.
Our experienced business advisors can help you work through the broader financial and business-planning considerations involved in building a stronger, more sustainable business.
Connect with a Hawaiʻi SBDC business advisor to get started.
Disclaimer: Hawaiʻi SBDC does not provide individualized investment, legal or tax advice. This article is for general educational purposes only. Consult with a qualified financial advisor, CPA or tax professional regarding your individual circumstances. Hawaiʻi SBDC has no affiliation with or financial interest in any financial institution, investment provider or product referenced in this article.