The right retirement plan for a business owner depends on three things: how much you want to contribute and deduct, whether you have employees whose coverage you are responsible for, and how much administrative complexity you are willing to manage. For most owner-only or owner-spouse businesses, a Solo 401(k) offers the highest contribution limits with the least complexity. For owners with employees, a traditional 401(k) or SIMPLE IRA is typically more appropriate. For high-income owners who want to shelter the most income possible and are willing to commit to larger annual contributions, a defined benefit or cash balance plan can produce deductions significantly larger than any defined contribution plan allows. Mid-year is the right time to make this decision — most plans must be established before December 31 to allow contributions for the current tax year.
For a business owner in a high tax bracket, a retirement plan is not just a savings vehicle — it is one of the most powerful and legitimate tax deductions available. Every dollar contributed to a qualifying retirement plan reduces taxable business income dollar for dollar, shelters investment growth from current taxation, and builds personal wealth inside a structure that the business funds.
The difference between a business owner who maximizes retirement plan contributions and one who does not can be substantial over time — not just in retirement savings, but in cumulative tax liability. According to the IRS, the annual contribution limits for qualified retirement plans are adjusted upward periodically for inflation, and the deduction is available to businesses of virtually any size and structure.
The decision also has a deadline that most owners underestimate. For most plan types, the plan must be established — not just funded, but legally created and documented — by December 31 of the tax year for which contributions will be deducted. Solo 401(k) plans, for example, must have a plan document in place before year-end even though employee contributions can technically be made up to the tax return due date. Starting this conversation in July gives you time to evaluate options, select the right plan structure, and get the paperwork in place before the window closes.
A Business Advisory and Accounting Partners business advisor works with owners on retirement plan selection as part of the mid-year advisory cadence — connecting the plan decision to the owner's tax projection, compensation strategy, and long-term wealth-building goals.
A Solo 401(k) — also called an individual 401(k) or owner-only 401(k) — is available to self-employed individuals and business owners with no full-time W-2 employees other than themselves and their spouse. It combines two contribution sources: an employee elective deferral component and an employer profit-sharing component, which together allow higher total contributions than any other plan type at similar income levels.
The employee deferral component has an annual limit set by the IRS and adjusted periodically for inflation, with an additional catch-up contribution available for owners age 50 and older. Under SECURE 2.0, owners in the 60 to 63 age range are eligible for an even higher catch-up amount during those years. The employer profit-sharing component can add up to 25% of W-2 compensation for S-Corp owners — or a comparable percentage of net self-employment income for sole proprietors — with the combined total subject to a separate annual additions limit that the IRS also adjusts over time. For many owner-only businesses, a Solo 401(k) allows total annual contributions that dwarf what a SEP IRA would permit at the same income level.
The Solo 401(k) also allows a Roth contribution option, loan provisions, and — importantly — the ability to make large contributions at relatively modest income levels because of how the employee deferral component works. The trade-off is that adding a full-time non-owner employee triggers a plan redesign requirement, as noted in IRS guidance issued under SECURE 2.0.
A Simplified Employee Pension (SEP IRA) allows employer contributions of up to 25% of eligible employee compensation — or approximately 20% of net self-employment income for sole proprietors — subject to an annual additions cap that the IRS adjusts periodically for inflation. That same cap applies to Solo 401(k) total contributions, which makes the two plan types directly comparable at higher income levels.
The SEP IRA is simpler to administer than a Solo 401(k) — there is no plan document requirement, no annual filing obligation below certain asset thresholds, and contributions can be made up to the tax return due date including extensions. For businesses with eligible employees, all eligible employees must receive a proportional SEP contribution, which increases the cost significantly.
The SEP IRA makes the most sense for sole proprietors or single-member LLCs who want simplicity and whose contribution needs are met by the percentage-of-compensation formula. For S-Corp owners or those who want to maximize contributions at lower income levels, the Solo 401(k) is almost always the better choice because of the employee deferral component.
A Savings Incentive Match Plan for Employees (SIMPLE IRA) is designed for small businesses with 100 or fewer employees. It allows employees to make elective deferrals up to an annual limit the IRS sets and adjusts over time, with a required employer contribution — either a dollar-for-dollar match up to 3% of compensation or a flat 2% non-elective contribution for all eligible employees.
According to the IRS, SIMPLE IRAs are among the easiest plans to administer for small businesses with employees, but the mandatory employer contribution and the lower employee deferral limits compared to a traditional 401(k) make them less optimal for owners primarily focused on maximizing their own tax-deferred savings. SECURE 2.0 increased SIMPLE IRA contribution limits for certain small employers and introduced additional flexibility in some plan design scenarios, making them more competitive in specific situations worth discussing with an advisor.
A defined benefit plan — including the increasingly popular cash balance plan variant — is the highest-contribution retirement plan available to business owners. Rather than defining how much goes in, it defines the benefit that will be paid out, and the contribution required to fund that benefit is actuarially determined based on the owner's age, income, and target benefit amount.
For high-income owners in their 50s and 60s who want to shelter the maximum possible income, a cash balance plan can allow annual contributions well in excess of what any defined contribution plan permits — sometimes $200,000 or more per year depending on age and income, according to actuarial guidelines referenced in Thomson Reuters Checkpoint. The deduction is immediate and fully available in the year of contribution.
The trade-offs are meaningful: defined benefit plans require actuarial calculations each year, carry annual filing requirements (Form 5500), and require consistent funding commitments — missing a required contribution can trigger plan disqualification. They are best suited for owners with stable, high income who are committed to funding the plan for at least three to five years. Many high-income owners combine a cash balance plan with a 401(k) profit-sharing plan to maximize total annual deferrals.
Entity structure directly affects retirement plan contribution calculations, which is one of the reasons plan selection cannot be separated from the owner compensation strategy conversation. For S-Corp owners, retirement plan contributions — specifically the employer profit-sharing component — are based on W-2 wages paid to the owner, not on total business profit. This means an S-Corp owner who pays themselves a low salary to minimize payroll taxes also limits their profit-sharing contribution capacity.
For sole proprietors and single-member LLCs taxed as Schedule C, contributions are based on net self-employment income after the self-employment tax deduction, which introduces a calculation that differs from the W-2 basis used for S-Corp owners. The AICPA notes that the interaction between entity structure, owner compensation, the QBI deduction, and retirement plan contribution limits makes plan optimization a multi-variable problem that rewards integrated advisory rather than siloed decision-making.
This is a fictional example to illustrate how Business Advisory and Accounting Partners would advise a client in this situation.
Sandra owns a speech-language pathology practice in Virginia, operating as an S-Corp with no full-time employees other than herself. Her practice generates approximately $480,000 in annual revenue, and she pays herself a $110,000 W-2 salary. She has been contributing to a SEP IRA for three years based on a recommendation from a prior accountant who described it as simple and sufficient.
In July 2026, Sandra's advisory conversation with Business Advisory and Accounting Partners began with a review of her current plan. Her SEP IRA contribution for the prior year — 25% of her W-2 compensation — had been approximately $27,500. Her practice's net profit after her salary was well in excess of that amount, and her effective tax rate on that remaining profit was significant.
Business Advisory and Accounting Partners would immediately identify the opportunity. Because Sandra is an S-Corp owner with no employees, she is eligible for a Solo 401(k). The employee deferral component of the Solo 401(k) would allow her to contribute the current-year deferral limit as an employee contribution — an amount the SEP IRA formula does not provide at all, since SEP contributions are employer-only. Adding the profit-sharing component on top of the deferral would bring her total contribution meaningfully above what the SEP IRA allowed, generating a substantially larger deduction for 2026.
The advisory team would also model whether Sandra's income level and age — she is 54 — made a cash balance plan worth evaluating in parallel with the Solo 401(k), and run the numbers on whether the additional actuarial cost of a defined benefit layer was justified by the additional deduction it would produce.
The plan establishment deadline would be flagged explicitly: the Solo 401(k) plan document must be in place before December 31, 2026. Starting the process in July gives Sandra ample time to set up the plan, make payroll elections, and coordinate contributions with her year-end tax projection.
If you see pieces of your own situation in this example, it may be time to sit down with a Business Advisory and Accounting Partners business advisor and review whether your current retirement plan is actually the right one for your business.
Business Advisory and Accounting Partners, powered by Harness, treats retirement plan selection as a tax strategy decision, not an HR task. The firm connects plan choice to entity structure, owner compensation, the QBI deduction, and the year-end tax projection — because the plan that produces the largest deduction in isolation may not be the optimal choice when the full picture is considered.
The firm's advisory cadence includes a mid-year review of retirement plan contributions as a standard planning checkpoint — specifically because the plan establishment deadline requires decisions to be made well before year-end, and because contribution capacity changes as the year-end projection takes shape. Any firm can file the return that reflects what you contributed. This firm helps you decide what to contribute — and why — before the year is over.
A retirement plan planning conversation at Business Advisory and Accounting Partners covers your current plan structure, your contribution capacity given your entity type and compensation, the plan options available to you and how they compare on contribution limits and administrative requirements, and a projection of the tax impact of maximizing contributions under each scenario. You will leave with a clear recommendation, an understanding of the establishment deadline that applies to your situation, and a specific next step for getting the plan in place before year-end.
It is a professional, educational conversation with no obligation to move forward beyond the meeting. The goal is to make sure you are not leaving one of the most valuable tax deductions available to business owners on the table.
| If you want to know which retirement plan is right for your business and how much you could be deducting, schedule time with a Business Advisory and Accounting Partners powered by Harness business advisor today. |
Book your conversation at: https://busadvisory.com/schedule-your-advisory-fit-meeting/
For owner-only businesses, a Solo 401(k) typically allows the highest total annual contribution at most income levels because it combines an employee deferral component with an employer profit-sharing component. For very high-income owners, particularly those in their 50s and 60s, a defined benefit or cash balance plan can allow even larger annual contributions — sometimes significantly exceeding defined contribution plan limits — making it the highest-deduction option for owners committed to consistent funding. The right answer depends on your income, age, entity structure, and whether you have employees.
Both plans allow employer contributions up to a similar annual cap, but the Solo 401(k) also allows an employee elective deferral — a contribution source the SEP IRA does not have. That deferral component allows Solo 401(k) owners to contribute significantly more at moderate income levels where the 25% employer formula alone would produce a smaller result. The SEP IRA is simpler to administer and has no plan document requirement, but for S-Corp owners or those wanting to maximize contributions, the Solo 401(k) is almost always the stronger choice.
The Solo 401(k) plan document must be established — signed and in place — by December 31 of the tax year for which you want to make contributions. Employee elective deferrals must also be elected before December 31. Employer profit-sharing contributions can generally be made up to the tax return due date including extensions. Starting the setup process in mid-year gives you ample time and eliminates the risk of missing the year-end plan establishment deadline.
Yes. S-Corp owners are eligible for a Solo 401(k) provided the business has no full-time W-2 employees other than the owner and the owner's spouse. For S-Corp owners, both the employee deferral and the employer profit-sharing contribution are based on W-2 compensation — which is one reason the owner compensation strategy and the retirement plan contribution strategy need to be planned together. A low owner salary reduces both payroll tax exposure and retirement plan contribution capacity simultaneously.
A cash balance plan is a type of defined benefit plan that expresses the promised benefit as a hypothetical account balance rather than a monthly payment amount. Annual contributions are actuarially determined based on the owner's age, income, and target account balance, and can be substantially larger than defined contribution plan limits — particularly for owners in their 50s and 60s. According to actuarial guidelines, annual contributions for older, high-income owners can reach well into six figures. The plan requires annual actuarial certification, Form 5500 filing, and consistent funding commitments.
Mid-year — July specifically — is the optimal time. Most retirement plans must be established before December 31, and contribution decisions need to be coordinated with the year-end tax projection to maximize the deduction without creating cash flow problems. Business Advisory and Accounting Partners reviews retirement plan structure as part of the standard mid-year advisory cadence. Schedule a conversation at https://busadvisory.com/schedule-your-advisory-fit-meeting/
