Your Business Gives You Access to the Best Retirement Accounts in the Tax Code. Are You Using Them?
Business owners have access to the most powerful retirement accounts in the tax code. Better than what a senior employee at a large company gets. Better than almost anything available to someone on a W-2 alone.
Most owners use a fraction of what is available.
The common pattern is a plan chosen years ago, when profit was much smaller, and never revisited. A SEP IRA opened in ten minutes. A SIMPLE IRA from when the business had three employees. Or no plan at all, on the theory that the business itself is the retirement plan.
The cost of that gap is paid every April, at the top federal rate plus state tax, on income that did not need to be taken this year.
Here is what is actually available in 2026, how the pieces layer, and what the numbers look like.
The Four Tools
1. Solo 401(k): up to $72,000
This is for owners with no full-time employees other than a spouse. It has two parts.
Employee deferral: $24,500 in 2026. Age 50 or older adds an $8,000 catch-up. Ages 60 through 63 get an enhanced catch-up of $11,250 under a SECURE 2.0 provision.
Employer profit sharing: roughly 25% of W-2 wages for an S corp or C corp, or about 20% of net self-employment income for a sole proprietor or partnership. Only the first $360,000 of compensation counts.
Total cap: $72,000 in 2026, not counting catch-up. With catch-up, someone 50 or older can reach $80,000. Ages 60 through 63, up to $83,250.
The overlooked piece is what happens when deferral plus profit sharing does not reach $72,000. Some plans allow after-tax contributions to fill the remaining space, followed by an immediate conversion to Roth. That is the mega backdoor Roth. It is not automatic. The plan document must permit after-tax contributions and in-plan Roth conversions, and many low-cost providers do not offer either. A provider that lacks the feature is a reason to move the plan, not a reason to skip the strategy.
2. 401(k) with Employees
Same $24,500 employee limit and same catch-up rules. The difference is that once a business has staff, the plan must pass nondiscrimination testing, which is IRS language for a plan that cannot benefit only the owner.
Two design choices carry most of the weight.
Safe harbor. The employer commits to a required contribution, usually 3% or 4% of pay, and in exchange the plan automatically passes testing. The owner can max their deferral regardless of what employees choose to contribute.
New comparability profit sharing. This design groups employees into classes and tests on a benefits basis rather than a contributions basis, which allows contributions to be weighted toward owners and key employees. Structured properly, an owner can receive a large share of total profit sharing dollars while employees receive a smaller but meaningful percentage of pay. It is one of the most underused features in small business plan design.
There are also credits for starting a plan. Businesses with 50 or fewer employees can claim a startup credit covering up to 100% of administrative costs, capped at $5,000 per year for three years, plus a separate credit of up to $1,000 per employee for employer contributions, plus $500 per year for adding automatic enrollment. For many small firms and practices, the first several years of plan costs are largely offset.
3. Cash Balance Plan: $100,000 to $300,000 and up
This is the tool that changes the math for high earners.
A cash balance plan is a defined benefit plan presented as an account balance. Rather than a contribution limit, it carries a benefit limit: the plan can fund toward a maximum annual retirement benefit of $290,000 in 2026. An actuary calculates the contribution required to reach that target, and the number rises sharply with age.
A 45 year old might contribute $120,000 a year. A 58 year old might contribute $270,000 or more. It stacks on top of the 401(k) and profit sharing.
The tradeoffs are real. The contribution is a funding commitment, not a suggestion, so this fits income that is high and reasonably stable. An actuary and annual filings are required. And with employees, the plan generally needs to provide them roughly 5% to 7.5% of pay to satisfy testing. For a business with a handful of employees and $1 million of owner profit, that cost is small relative to the tax savings. For a business with 40 employees and thin margins, it may not work.
4. SEP IRA: Simple, and Usually the Wrong Fit
A SEP allows up to 25% of compensation, capped at $72,000. No employee deferral, no catch-up.
Set that against a solo 401(k). The ceiling is identical, but a SEP requires reaching it entirely through the employer contribution, which takes roughly $288,000 of W-2 wages. A solo 401(k) arrives at the same place on far less compensation, because the $24,500 deferral counts toward the total.
Two further problems. With employees, a SEP requires the same contribution percentage for everyone, so a 20% contribution for the owner means 20% for every eligible employee. No weighting, no safe harbor, no design flexibility.
And a SEP is an IRA. That balance triggers the pro-rata rule and can undermine the backdoor Roth strategy for the owner and spouse, turning what looks like a tax-free conversion into a taxable one.
SEPs have a legitimate place, mainly for a side business with no employees where the owner wants zero administration. As the primary plan for a profitable company, it is almost always the wrong tool.
How It Stacks
Consider a 52 year old S corp owner with $180,000 of W-2 wages and $700,000 of net profit, no employees other than a spouse:
Employee deferral: $24,500
Catch-up: $8,000
Employer profit sharing at 25% of wages: $45,000
Solo 401(k) subtotal: $77,500
Cash balance contribution: roughly $180,000
Total deferred: about $257,500. At a combined 45% marginal rate, roughly $115,000 of tax is deferred in a single year and stays invested rather than leaving with the April payment.
Adding a spouse to payroll expands the numbers further.
One Rule Change for 2026
Beginning this year, a participant age 50 or older who earned more than $150,000 in W-2 wages from the business in 2025 must make catch-up contributions on a Roth basis. Pre-tax catch-up is no longer available to them.
The test looks backward at prior year wages, so a large bonus year can trigger it even if current income drops. Sole proprietors and partners with no W-2 wages are outside the rule entirely, because there are no wages to test.
This is not a bad outcome. Roth dollars are valuable, particularly given uncertainty about future tax rates. But an $8,000 catch-up now carries a current-year cost, and it belongs in the tax projection rather than arriving as a surprise.
Three Common Mistakes
Setting the plan once and never revisiting it. A plan deserves review whenever profit changes materially, whenever the business hires or loses employees, and whenever the entity structure changes. A design built for $400,000 of profit is not the right design at $1.5 million.
Optimizing the deduction while ignoring the tax bill later. Every pre-tax dollar deferred is a dollar eventually withdrawn at ordinary rates, with required distributions beginning at 73 or 75. The objective is not the largest deduction. It is the lowest lifetime tax. That usually calls for a deliberate mix of pre-tax, Roth, and taxable brokerage assets, and using lower income years between a business sale and Social Security to convert at favorable rates.
Treating the plan as separate from the exit. A sale within five years changes the design. A heavily funded cash balance plan can be terminated and rolled over, but the sequencing matters, and so does how the deferred balance interacts with income in the sale year.
Timing Matters
The deadlines are not flexible.
A safe harbor 401(k) generally must be in place by October 1 to count for the current year. A cash balance plan must be adopted by the tax filing deadline including extensions. Solo 401(k) rules are more forgiving now, but waiting until March narrows the options considerably.
Three questions determine most of the answer. What is projected net profit this year? How much of it is actually needed for living expenses? And how many employees would a plan have to cover?
Those answers point to which of the four tools fits and roughly how much income can be sheltered. The rest is design detail.
If your plan has not been reviewed in a few years, that review is worth having. Reach out for a plan design analysis based on your specific profit, payroll, and employee census, with the numbers for each structure side by side.
