If you’re a high-income entrepreneur, you’re likely focused on scaling your business, optimizing cash flow, and minimizing taxes. But there’s a powerful, often underused lever that can help you do all three: a qualified retirement plan.
Used strategically, these plans can slash your tax bill, accelerate wealth accumulation, and create a nest egg outside your business.
Let’s break down what you need to know.
Qualified plans aren’t just for employees
When most business owners think of retirement plans, they think of 401(k)s designed for employees. But the tax code offers a range of qualified retirement plans that can designed to allocate a larger share of contributions to owners, within the boundaries of nondiscrimination rules.
ERISA and the Internal Revenue Code govern qualified plans. They include a host of options, each with different rules around contributions, deductibility, and required administration.
The key takeaway? You can legally defer and shelter six-figure amounts annually in a qualified plan tailored to your situation.
Why they matter for high earners
As your income climbs, so does your tax liability. Federal marginal tax rates currently top out at 37%, not including the 3.8% net investment income tax or state taxes, if applicable.
Qualified retirement plans allow you to:
- Deduct contributions from business income
- Defer taxes on growth
- Potentially convert to Roth status later at lower tax brackets
- Protect assets from creditors (in most cases)
These features are especially valuable for entrepreneurs with volatile income, strong profits, and a long runway until retirement.
Know your options
There’s no one-size-fits-all retirement plan for business owners. The right choice depends on factors like your age, number of employees, compensation structure, and how much you want to contribute. Here’s a breakdown of the most common options:
1. Solo 401(k):
Ideal for: Solo entrepreneurs with no full-time employees (other than a spouse).
Contribution limit: Up to $70,000 in 2025 (add $7500 if over age 50).
Tax benefit: Contributions are deductible, and earnings grow tax-deferred.
2. SEP IRA:
Ideal for: Business owners with few or no employees.
Contribution limit: Up to 25% of compensation, capped at $70,000 in 2025.
Drawback: You must contribute the same percentage of compensation for all eligible employees.
3. SIMPLE IRA:
Ideal for: Small businesses with fewer than 100 employees.
Contribution limit: Up to $16,500 in 2025 (plus $3,500 catch-up if over age 50). For individuals ages 60 to 63, a special catch-up contribution of $5,250 replaces the standard catch-up amount.
Drawback: Lower contribution limits and mandatory employer match.
4. Traditional 401(k):
Ideal for: Businesses with employees who want a robust retirement benefit.
Contribution limit: $23,500 in 2025, plus a catch-up contribution of $11,250 if you are between ages 60 and 63. This replaces the standard $7,500 catch-up during those years if your plan allows it.
5. Defined benefit (pension) plan:
Ideal for: Older, high-income business owners who want to defer very large amounts.
Contribution limit: Depends on age and income, increased to a maximum of $280,000 annually in 2025, as adjusted by the IRS under routine COLA rules.
Drawback: Requires annual actuarial certification and consistent funding.
Stacking plans can supercharge tax deferral
One advanced strategy is combining a 401(k) with a cash balance plan (a form of defined benefit plan). This can allow certain owners to make annual contributions of over $300,000, often with most of the benefit skewed toward the entrepreneur.
These setups are complex and require actuarial calculations, but they can be ideal for maximizing tax deferral in peak earning years.
Don’t ignore compliance and testing
Qualified retirement plans come with administrative requirements. For 401(k) and defined benefit plans, you’ll need to:
- Perform nondiscrimination testing
- File Form 5500 annually
- Operate within IRS and Department of Labor rules
You’ll need a third-party administrator (TPA), an ERISA attorney, and a financial advisor who is well-versed in plan design and compliance.
Getting it wrong can be costly. The IRS imposes penalties for failing to follow plan rules, and employees can sue under ERISA for breaches.
Roth vs. pre-tax: timing matters
High-income entrepreneurs often default to pre-tax contributions to reduce their current liability. That’s usually smart. But if you anticipate a lower-income year or plan to retire early, Roth contributions may make more sense.
Some plans allow for “in-plan Roth conversions,” letting you shift pre-tax dollars to Roth while paying tax now at a potentially lower rate.
Advanced versions of this strategy include the “mega backdoor Roth,” which involves making after-tax contributions to a 401(k) and converting them within the plan. However, not all 401(k) plans permit after-tax contributions or in-plan conversions, so this strategy depends on the specific design of your plan.
Think beyond your exit
One of the biggest risks entrepreneurs face is overconcentration in their own businesses. A qualified retirement plan helps diversify wealth into liquid, tax-advantaged investments.
This is crucial if:
- You plan to sell the business and retire
- Your business may not command the exit multiple you hope for
- You want to leave assets to family or donate to charity tax-efficiently
Qualified plan assets may receive favorable estate tax treatment if left to a spouse or structured properly with estate planning techniques.
Too many business owners view retirement plans as set-it-and-forget-it options. That’s a mistake. The most successful entrepreneurs treat these plans as part of a larger wealth and tax strategy.
A tax-smart retirement plan should be integrated with:
- Business structure (LLC, S-corp, C-corp)
- Compensation planning
- Exit or succession planning
- Personal financial goals
Your team should include a fiduciary financial advisor, CPA, and ideally, a TPA who understands how to customize plan design to serve your best interests.
