Retirement Planning for Business Owners

Why Business Owners Have a Retirement Planning Advantage

As a business owner, you have access to retirement vehicles that W-2 employees can only dream about. While a typical employee is limited to a $23,500 annual 401(k) contribution, a self-employed business owner can shelter well over $100,000 per year—and in some cases more than $300,000—through the right combination of plans. The key is choosing the correct structure for your income level, entity type, and long-term goals.

Too many business owners default to a simple IRA or ignore retirement accounts altogether, leaving enormous tax savings unclaimed year after year. Every dollar contributed to a qualified plan reduces your current taxable income, grows tax-deferred (or tax-free in the case of Roth accounts), and compounds without the drag of annual capital gains taxes. Over a 20-year career, the difference between a properly structured retirement plan and no plan at all can easily exceed $2 million in accumulated wealth.

At AE Tax Advisors, we specialize in designing retirement strategies that align with your overall business tax plan. The right retirement vehicle is not a standalone decision—it must integrate with your entity structure, cash flow, compensation strategy, and succession planning.

Solo 401(k): The Powerhouse for Self-Employed Business Owners

The Solo 401(k)—also known as the Individual 401(k) or one-participant 401(k)—is the single most powerful retirement tool available to self-employed individuals and owner-only businesses. It allows both employee deferrals and employer profit-sharing contributions, creating two separate contribution streams that stack together for maximum tax deferral.

For 2026, the employee deferral limit is $23,500, with a $7,500 catch-up contribution for those aged 50 and older. On top of that, you can contribute up to 25% of your net self-employment income (or W-2 compensation from your S-Corp) as employer profit-sharing. The total combined limit reaches $70,000—or $77,500 with catch-up contributions.

The Solo 401(k) also offers a Roth option, allowing you to make after-tax contributions that grow completely tax-free. For business owners who expect higher tax rates in future years, splitting contributions between traditional and Roth can create valuable tax diversification. Additionally, Solo 401(k) plans allow participant loans of up to $50,000, giving you access to your funds without triggering taxes or penalties.

One critical planning point: if you operate your business as an S-Corporation, your W-2 salary determines the base for both employee deferrals and employer contributions. Setting your salary too low to save on payroll taxes can inadvertently cap your retirement contributions. We work with our clients to find the optimal salary level that balances payroll tax savings against retirement contribution capacity.

SEP-IRA: Simple Setup, Significant Contributions

The Simplified Employee Pension IRA is the easiest qualified plan to establish and administer. You can open a SEP-IRA, fund it, and deduct the contribution—all on the same day, even after the tax year has ended (up to the filing deadline, including extensions). This makes the SEP-IRA an excellent last-minute tax reduction tool.

Contribution limits allow up to 25% of W-2 compensation or 20% of net self-employment earnings, capped at $70,000 for 2026. There are no employee deferral provisions and no Roth option, which means you lose some flexibility compared to a Solo 401(k). However, for business owners who want simplicity and have no employees, the SEP-IRA delivers strong results with minimal paperwork.

One important consideration: if you have employees who meet the eligibility requirements (age 21, worked for you in at least 3 of the last 5 years, and earned at least $750), you must contribute the same percentage for them as you do for yourself. This can make the SEP-IRA expensive for businesses with staff. In those situations, a Solo 401(k) or a traditional 401(k) with a vesting schedule is typically more cost-effective.

Defined Benefit Plans: Maximum Contributions for High Earners

For business owners earning $300,000 or more and looking to shelter the largest possible amount, a defined benefit plan is the ultimate retirement vehicle. Unlike defined contribution plans (401(k), SEP-IRA) that cap at $70,000, a defined benefit plan can allow annual contributions exceeding $200,000—and in some cases over $300,000—depending on your age and income.

Defined benefit plans work like traditional pensions: an actuary calculates the annual contribution needed to fund a target retirement benefit. The closer you are to retirement age, the larger the required annual contribution, because there are fewer years for the money to grow. This makes defined benefit plans especially powerful for business owners in their 50s and 60s who need to accelerate their retirement savings.

The most effective approach is often a combination strategy—layering a defined benefit plan on top of a Solo 401(k). This dual-plan structure can allow total annual contributions of $250,000 to $350,000 or more, all fully tax-deductible. For a business owner in the 37% federal bracket plus state taxes, that can translate to $100,000 or more in annual tax savings.

Defined benefit plans do require actuarial administration, annual funding commitments, and IRS filings (Form 5500). They work best for businesses with stable, predictable income. If your revenue fluctuates significantly year to year, the mandatory funding requirements could create cash flow pressure in down years. We help our clients evaluate whether the tax savings justify the administrative cost and funding commitment.

Choosing the Right Plan for Your Situation

The best retirement plan depends on several factors that are unique to your business. Here is a practical framework for evaluating your options:

Solo operators earning under $150,000: A Solo 401(k) with Roth contributions offers the best balance of flexibility and tax savings. You can adjust contributions year to year with no mandatory funding requirements.

Solo operators earning $150,000 to $300,000: A Solo 401(k) maxed at $70,000 is the starting point. If you want to shelter more, adding a cash balance defined benefit plan can push total contributions above $150,000.

High earners above $300,000: The combination of a Solo 401(k) plus a defined benefit plan delivers maximum tax deferral. This is where the real planning value lies—structuring your compensation to support $200,000 to $350,000 in total annual contributions.

Businesses with employees: Traditional 401(k) plans with safe harbor provisions, profit-sharing, and cross-testing (also called new comparability) allow owners to maximize their own contributions while meeting required contribution levels for staff. Cross-tested plans are particularly powerful because they let you allocate a higher percentage of contributions to older, higher-paid participants—typically the owners.

Every plan choice connects back to your broader tax strategy. Your entity type, income structuring, and exit planning timeline all influence which retirement vehicle delivers the greatest after-tax benefit.

Tax-Deferred Growth and Distribution Planning

The power of tax-deferred compounding cannot be overstated. A $100,000 annual contribution growing at 7% per year accumulates to approximately $1.97 million after 12 years in a tax-deferred account—compared to roughly $1.55 million in a taxable account (assuming a 25% blended tax rate on investment gains). Over 20 years, the gap widens to $4.1 million versus $2.9 million. Tax deferral is not just a timing benefit; it is a wealth-building accelerator.

Equally important is planning for distributions. Required minimum distributions (RMDs) begin at age 73, and the amounts are calculated based on your total qualified plan and IRA balances. Without a distribution strategy, large RMDs can push you into the highest tax brackets during retirement—undermining years of tax-deferred savings.

Strategies to manage future RMDs include Roth conversions during lower-income years, strategic timing of Social Security benefits, charitable distributions from IRAs after age 70-1/2, and spreading distributions across multiple years before RMDs begin. We build these projections into every retirement plan we design, so your accumulation strategy and your distribution strategy work together.