Written by Tyler WaltersMost owners pick a retirement plan once, early, when the business was smaller - and never revisit it, even as their income and their ability to shelter it grew enormously. The result is often thousands of dollars a year going to tax that did not have to. The main options for a business owner are the SEP-IRA, the Solo 401(k), the standard 401(k) with profit sharing, and the cash balance plan. They differ mainly in how much you can contribute, how much administration they require, and whether you have employees. The right one depends on your income, your business structure, whether you have staff, and how much you're trying to shelter. This is general information - your CPA can confirm what fits your situation.
A SEP-IRA is the simplest - easy to set up and administer, with contributions based on a percentage of income. A Solo 401(k), for an owner with no employees other than a spouse, often allows larger total contributions at the same income level, because it combines an employee deferral with an employer contribution. For many self-employed owners without staff, the Solo 401(k) shelters more than a SEP at the same income - which is why the simpler option isn't always the better one.
When a high-income owner is already maxing out a 401(k) and still wants to shelter more. A cash balance plan is a type of defined benefit plan that can allow much larger annual contributions - often well into six figures - layered on top of a 401(k). It fits profitable owners with strong, stable cash flow who want to accelerate retirement savings and reduce current taxable income, often later in their careers. It asks for a funding commitment, so predictable income matters.
Start with the questions that drive it: Do you have employees? How much are you trying to shelter? How stable is your income? An owner with no employees sheltering a moderate amount may be best served by a Solo 401(k); a high-income owner maxing that out may add a cash balance plan; a business with a larger team has other considerations, from profit sharing to plan design that works across the whole company. The plan should be designed around you as the owner, not set on a default. We help Kitsap owners match the plan to the goal, coordinated with your CPA.