Business 401(k) Check: Am I Paying Myself Right?
By Michael Sicuranza, CFP®,CPA, AEP®
Here is a question most business owners avoid: Am I paying myself right?
Not salary. Retirement contributions.
Most business owners set up a SEP-IRA or a basic 401(k) years ago, contribute something reasonable, and assume the job is done. But the difference between something reasonable and fully dialed in can be $50,000 or more per year in additional tax-advantaged savings.
That gap compounds. Over 10 years, it is not just $500,000 in missed contributions. It is the growth on those contributions, the tax savings you did not capture, and the retirement timeline that could have been different.
Here is how to know if your plan is working as hard as it should be.
The SEP-IRA trap
SEP-IRAs are simple. That is their appeal. You open one in 15 minutes, contribute up to 25% of your net self-employment income, and you are done.
But simple has limits.
A SEP-IRA only allows employer contributions. There is no employee deferral component. If your income is $300,000, your maximum SEP contribution is around $69,000. That sounds like a lot until you realize a solo 401(k) with profit sharing can often get you to the same place with more flexibility, and a cash balance plan can get you much further.
The other problem: if you have employees, SEP-IRA rules require you to contribute the same percentage for them as you do for yourself. That changes the math quickly.
The solo 401(k) advantage
A solo 401(k) lets you contribute as both employee and employer.
As an employee, you can defer up to $23,500 in 2026 (or $31,000 if you are 50 or older). As the employer, you can add profit sharing contributions on top of that, up to the combined limit of $69,000 (or $76,500 with catch-up).
That is the same ceiling as a SEP-IRA, but with more control. You can make Roth contributions. You can take loans from the plan. And if you have a spouse who works in the business, they can participate too, effectively doubling the household contribution.
For most solo practitioners and small practice owners, this is the baseline. If you are still using a SEP-IRA and your income supports it, the switch is worth evaluating.
The cash balance multiplier
Here is where most business owners leave the biggest opportunity on the table.
A cash balance plan is a type of defined benefit plan. Unlike a 401(k), which has fixed contribution limits, a cash balance plan allows contributions based on age, income, and a target benefit at retirement.
For a 50-year-old business owner earning $400,000 or more, that can mean contributions of $150,000 to $250,000 per year. Combined with a 401(k), total annual contributions can exceed $200,000.
The contributions are tax-deductible. The growth is tax-deferred. And the plan can be designed to fit your specific situation.
Cash balance plans require more administration and actuarial work. They are not right for everyone. But for high-income business owners who want to accelerate retirement savings and reduce taxable income, they are one of the most powerful tools available.
How to know if you are leaving money behind
Ask yourself three questions:
When is the last time I reviewed my plan structure? If it has been more than 3 years, or if your income has changed significantly, you are probably overdue.
Am I contributing the maximum my plan allows? If not, why not? Is it a cash flow issue, or did you just pick a number and stick with it?
Is there a better structure for my situation? The answer depends on your income, your age, your employees, and your goals. A 10-minute conversation can usually identify whether there is a gap.
The bottom line
Your retirement plan is not a set-it-and-forget-it decision. It is a tool that should evolve as your business and income grow.
If you are a business owner contributing something reasonable and assuming the job is done, you may be leaving tens of thousands of dollars per year on the table.
A plan design review takes 30 minutes. It compares what you are doing now to what is possible, and it shows you exactly where the gaps are.
If you want to find out whether your plan is working as hard as it should, a Connect Meeting is a good place to start.
