Beyond the SEP IRA: 5 Retirement Plans for High-Income Solo Business Owners

If you’re over 50, self-employed, earning $250,000 or more, and have no employees, your retirement plan may be one of your biggest remaining tax-planning opportunities.

This is especially true for consultants, Realtors, attorneys, physicians, fractional executives and other highly compensated solo professionals.

It also comes up frequently for people who leave corporate America later in their careers and begin consulting.

Imagine you spent 25 or 30 years working for a large company. You leave at 57, start consulting, and suddenly your new business is generating $250,000 or $300,000 a year.

You no longer have the corporate 401(k).

So what do you do?

A common answer is:

“I’ll just open a SEP IRA.”

And there’s nothing inherently wrong with a SEP IRA.

But it may not be your best option.

For a high-income solo business owner—particularly one in their 50s or early 60s—the difference between a SEP IRA, Solo 401(k), and a more advanced retirement plan can represent a significant amount of additional retirement savings and potential tax deductions over the final decade of a career.

The important question isn’t simply:

“Which retirement account should I open?”

It’s:

“Which retirement plan best fits my income, age, business structure, cash flow and retirement goals?”

Those are very different questions.

A Quick Introduction

Hi, I’m Dwight Dettloff, CFP, CPA. Winding Trail Financial Planning provides coordinated tax and financial planning for people approaching retirement, including business owners and self-employed professionals trying to make the most of their final high-income working years.

One situation we see frequently is a business owner in their 50s or 60s earning good money, with no—or very few—employees, who has never really looked beyond a SEP IRA or basic retirement account.

But often, the retirement plan isn’t the only issue.

Maybe your CPA handles the tax return, your financial advisor manages the investments, and your payroll company processes your salary—but nobody is really looking at how those decisions fit together.

Or maybe you’re doing most of it yourself and wondering whether there are planning opportunities you’re missing.

That’s the gap we’re trying to solve.

Your business structure, compensation, taxes, retirement plan and investments all affect one another. Especially as you get closer to retirement, those decisions shouldn’t be made independently.

If you’re earning good money but aren’t confident that all the pieces are working together, start here to learn how we work and schedule an introductory conversation.

Otherwise, keep reading. Below, I’ll walk through the major retirement-plan options available to solo business owners—and, more importantly, how to start thinking about which one actually fits your broader tax and retirement strategy.

Quick Answer: What Is the Best Retirement Plan for a High-Income Self-Employed Person?

For many high-income solo business owners, a Solo 401(k) can provide more flexibility than a SEP IRA because the owner can contribute while wearing two hats: as both the employee and the employer.

For older business owners with consistently high income who want to save substantially more, a cash balance or defined benefit plan combined with a Solo 401(k) may provide even greater retirement contribution and tax-planning opportunities.

But there is no universally “best” plan.

Your age, income, entity type, W-2 compensation, other retirement plans, employees, desired contribution amount and willingness to accept additional administrative complexity all matter.

Here are five options worth understanding.

1. Traditional and Roth IRAs: The Starting Point

The simplest place to start is an individual retirement account.

A Traditional IRA may provide a current tax deduction depending on your income and whether you or your spouse participate in another retirement plan.

A Roth IRA works differently. Contributions aren’t deductible, but qualified withdrawals in retirement can generally be tax-free.

For high-income business owners, direct Roth IRA contributions may be restricted by income limitations, and the deductibility of Traditional IRA contributions can also be limited.

IRAs are still useful.

But if you’re earning $200,000, $300,000 or $500,000 per year and trying to aggressively accumulate retirement assets during your final working years, an IRA by itself probably isn’t going to move the needle very far.

Think of the IRA as the first rung on the ladder—not necessarily the entire retirement strategy.

And remember that accumulating retirement accounts is only one part of the equation. Eventually those accounts have to become retirement income, and different account types are taxed differently. We discuss that in more detail in The Truth About How Much Retirement Benefits Are Taxed.

2. SEP IRA: A Great Rescue Plan - But Why Are We Rescuing You?

There’s a reason SEP IRAs have been so popular with accountants and self-employed business owners.

They can be incredibly useful when tax planning happens late.

Imagine you’re self-employed and April rolls around. Your tax return is finally coming together and the number is considerably larger than you expected.

You ask your accountant the inevitable question:

“Is there anything I can still do?”

A SEP IRA has historically been one of the tools an accountant could pull out of the toolbox. Depending on the circumstances, you may be able to establish and fund the plan by the business’s tax-filing deadline, including extensions, and still generate a deduction for the prior tax year.

That’s valuable flexibility.

And if I’m the accountant sitting across from you in April trying to find a legitimate way to reduce last year’s tax bill, I may be very happy that option exists.

But there’s another question worth asking: Why did we wait until April to start planning?

Maybe the accountant didn’t proactively raise the issue during the year.

Maybe you didn’t know you were supposed to call.

Maybe you were offered proactive tax planning but decided the additional cost wasn’t worth it.

Or maybe everyone was busy running the business and tax planning simply kept getting pushed down the list.

Usually, there isn’t a villain. There’s just a planning gap.

And that’s the important distinction between tax preparation and tax planning.

Tax preparation asks:

“Given everything that happened last year, how do we correctly report it—and what options do we still have?”

Tax planning asks:

“Given what we expect to happen this year, what decisions should we make before the year is over?”

A SEP IRA can be an excellent answer to the first question.

But a high-income solo business owner should probably be asking the second question, too.

Because if you’re 55, earning $300,000, have no employees and want to save aggressively for retirement, the objective shouldn’t necessarily be to find a deduction after the year is over.

The objective should be to determine beforehand what retirement-plan structure makes sense given your income, age, business entity, compensation, cash flow and retirement goals.

That might still be a SEP IRA.

But now you’ve chosen it as part of a plan—not because it was the best remaining option when the tax bill showed up.

3. SIMPLE IRA: When You Have Employees but Want to Keep it Simple

I’ll admit that I don’t encounter SIMPLE IRAs nearly as often with the type of solo business owner we’re talking about in this article.

I more commonly see them when a small business has a handful of employees and wants to offer a retirement plan without taking on all of the administration that can come with a 401(k).

That’s where the SIMPLE IRA can make a lot of sense.

Employees can contribute through salary reductions, and the employer makes either a matching or nonelective contribution. For a small business owner whose goal is essentially, “I’d like to offer my employees something, but I want to keep this relatively simple,” it can be a perfectly reasonable solution.

But that doesn’t mean a SIMPLE IRA has no place for a truly solo business owner.

One advantage over a SEP IRA is that the SIMPLE allows the owner to make an employee contribution in addition to the required employer contribution. With a SEP, contributions are employer contributions and are tied to compensation.

That difference can make a SIMPLE surprisingly useful in certain situations where the owner’s compensation isn’t especially high.

For the high-income owner, however, I’d generally want to compare it with a Solo 401(k) before making a decision. The Solo 401(k) may provide greater contribution capacity and flexibility, particularly as income rises and the owner gets closer to retirement.

There’s another tradeoff worth knowing: SIMPLE doesn’t always mean flexible.

There are special restrictions on moving money out of a SIMPLE IRA during your first two years of participation, and an employer generally can’t decide halfway through the year that it wants to terminate the SIMPLE and immediately replace it with something else.

So while the SIMPLE IRA can be relatively easy to establish and administer, you still want to think ahead before choosing one.

If you truly have no employees, a SIMPLE IRA probably isn’t the first plan I’d evaluate. But if you’re beginning to hire—or expect to soon—it deserves to be part of the conversation.

At that point, the question changes from “How much can I save for my own retirement?” to “How do I design a retirement plan that works for me and my employees?”

And once you’re asking that question, it’s also worth comparing the SIMPLE IRA with alternatives such as a safe harbor 401(k) rather than automatically choosing whichever plan appears easiest to set up.

4. Solo 401(k) + Profit Sharing: Often the Sweet Spot

This is where things get more interesting.

A Solo 401(k)—also called an individual or one-participant 401(k)—is generally designed for a business owner with no employees other than potentially a spouse.

The business owner effectively wears two hats:

Employee.

And:

Employer.

That means the owner may be able to make an employee elective deferral and also receive an employer contribution.

For business owners age 50 and older, additional catch-up contributions may also be available. Current law provides an even larger catch-up opportunity for certain participants in their early 60s.

That combination can make a Solo 401(k) considerably more powerful than many business owners realize.

Why does the employee/employer distinction matter?

Consider two solo business owners with similar businesses and similar profits.

One automatically establishes a SEP IRA.

The other establishes a Solo 401(k) and coordinates the employee deferral and employer contribution with the owner’s compensation and tax situation.

Both are saving for retirement.

But they may not have the same contribution capacity.

That’s why retirement-plan design shouldn’t happen in a vacuum.

The S Corporation wrinkle

This becomes particularly important for an owner whose business is taxed as an S corporation.

You’ve probably heard one of the primary S-corp tax strategies:

Pay yourself a reasonable salary and take the remaining profit as distributions.

That can potentially reduce payroll taxes.

But here’s where tax planning gets more interesting.

For an S-corporation shareholder, distributions generally aren’t treated as compensation for purposes of calculating qualified retirement-plan contributions. W-2 compensation matters.

So imagine a solo consultant has a highly profitable S corporation but pays herself a relatively low W-2 salary.

Her CPA may be focused on payroll taxes.

Her financial advisor may be focused on investments.

Her payroll provider may simply process whatever salary she was given.

But who is asking:

“How does the W-2 salary affect the retirement plan?”

That’s the planning opportunity.

Lowering salary may reduce one tax while simultaneously reducing the compensation available to support certain retirement-plan contributions.

That doesn’t mean the S corporation is wrong.

It doesn’t mean the salary should artificially be increased.

And it certainly doesn’t eliminate the reasonable-compensation requirement.

It means one tax decision shouldn’t be optimized without looking at what it does to the rest of the financial plan.

5. Cash Balance or Defined Benefit Plan: The Advanced Option

Now suppose you’re 58.

Your consulting business consistently generates $350,000 or $400,000 of income.

Your lifestyle doesn’t require all of that cash flow.

You’ve already accumulated retirement assets, but after decades of raising kids, paying mortgages, building a business or climbing the corporate ladder, you finally have the ability—and desire—to save aggressively.

This is where a cash balance or other defined benefit plan becomes worth discussing.

A cash balance plan is a type of defined benefit retirement plan.

Unlike a 401(k), where annual contributions are generally subject to a defined contribution limit, a defined benefit plan is designed around providing a specified retirement benefit. Contributions are determined using actuarial calculations.

That means contribution opportunities depend on factors including:

• age,

• compensation,

• retirement age,

• plan design,

• existing plan assets, and

• the benefit being funded.

For the right high-income business owner, that can potentially create much larger deductible contributions than a defined contribution plan alone.

But there is a tradeoff.

Cash balance plans generally involve more administration, actuarial work, ongoing funding considerations and expense.

This isn’t usually something you establish because you had one unusually good year.

It’s a strategy to evaluate when income is sufficiently high and predictable, you have meaningful excess cash flow, and you expect to continue funding the plan for a period of time.

In other words:

More tax savings usually comes with more complexity and commitment.

The Advanced Combination: Solo 401(k) + Cash Balance Plan

For some high-income solo professionals, the conversation doesn’t have to be:

Solo 401(k) OR cash balance plan?

It may be:

Solo 401(k) AND cash balance plan.

The two plans can potentially be designed to work together.

That can be particularly attractive for an older, high-income owner who wants to make significant retirement contributions over a relatively short remaining career.

Think again about the 57-year-old executive who leaves corporate America and starts consulting.

Maybe she expects to work another eight years.

Her consulting practice produces $300,000–$400,000 annually.

Her mortgage is manageable.

The kids are out of college.

She doesn’t need all of the business income to support her lifestyle.

Her problem isn’t necessarily that she hasn’t saved anything for retirement.

Her problem is that she now has high income, high taxes and a relatively short window in which she wants to accumulate substantially more retirement assets.

That’s a very different planning problem from a 32-year-old entrepreneur trying to put away their first $10,000.

And it may call for a very different retirement plan.

Which Retirement Plan Is Best for a Solo Business Owner?

Here’s a simplified way to think about the progression:

This isn’t a ranking.

A more complicated plan isn’t automatically a better plan.

The goal is to find the structure that fits what you’re actually trying to accomplish.

Not Sure Which Retirement Plan Fits Your Business?

If you’re self-employed, approaching retirement, and earning more than you need to support your current lifestyle, there may be an opportunity to put more of that income toward retirement while also reducing your current tax burden.

But the right answer depends on more than choosing between a SEP IRA, Solo 401(k), or cash balance plan. Your business structure, compensation, taxes, retirement timeline, investments, and cash flow all need to work together.

That coordination is exactly what we help clients with at Winding Trail Financial.

If you’re wondering whether your current retirement plan is really making the most of your situation, start here to learn more about working with us and schedule an introductory conversation.

Thanks for reading,

Dwight Dettloff, CPA, CFP®
Winding Trail Financial

Frequently Asked Questions

Is a Solo 401(k) better than a SEP IRA?

It can be.

A Solo 401(k) allows an eligible business owner to contribute in both employee and employer capacities, while a SEP IRA is funded through employer contributions. A Solo 401(k) can also provide catch-up contribution opportunities for older participants that a SEP IRA does not.

The better option depends on your income, age, business structure, other retirement plans and desired contribution amount.

Can an S-corp owner have a Solo 401(k)?

Yes. An eligible S-corporation owner can establish a Solo 401(k), assuming the business meets the plan requirements.

However, the owner’s W-2 compensation becomes important when calculating contributions. S-corporation distributions generally don’t substitute for W-2 compensation when determining retirement-plan contributions.

That’s one reason S-corp salary decisions should be coordinated with retirement planning rather than viewed solely as a payroll-tax strategy.

Can I have a Solo 401(k) and a cash balance plan?

Potentially, yes.

For the right business owner, a defined contribution plan such as a 401(k) can be paired with a cash balance or defined benefit plan.

The combination requires careful plan design and administration, but it can create significant retirement-funding capacity for certain high-income business owners.

Is a cash balance plan worth it for a self-employed person?

It can be, particularly for an older, high-income business owner with consistent cash flow who wants to save substantially more for retirement.

But cash balance plans are more complex and generally involve actuarial and administrative costs. They should be evaluated as a multi-year planning strategy rather than simply as a way to generate a large deduction in one good year.

What is the best retirement plan if I’m self-employed and over 50?

There isn’t one answer for everyone.

If you have no employees, a Solo 401(k) is often worth comparing with a SEP IRA because of its employee and employer contribution structure and catch-up provisions.

If your income is consistently high and you want to save substantially more, a cash balance plan—potentially paired with a 401(k)—may also be worth evaluating.

Your business entity and compensation structure can materially affect the analysis.

Don’t Choose a Retirement Plan Based Only on This Year’s Tax Deduction

There is one more piece of this conversation that gets overlooked.

Getting a tax deduction today is useful.

But eventually, you’re going to retire.

And most pre-tax retirement contributions generally create taxable income when the money comes back out.

So if you’re 55 and aggressively contributing to retirement accounts, you should also be thinking about what your tax situation might look like at 65, 70 and beyond.

Will you have a large pre-tax IRA balance?

Will you have Roth assets?

When will you claim Social Security?

Could required minimum distributions eventually push your income higher?

Might there be lower-income years after you stop working that create opportunities for Roth conversions?

Those questions don’t necessarily change whether you should make a deductible retirement contribution today.

But they are part of the same plan.

We’ve written more about that in Retirement Tax Planning: 7 Tax Traps to Avoid Before You Retire.

And if you’re approaching the transition from business owner or consultant to fully retired, What Should You Do 5 Years Before Retirement? covers many of the other decisions that need to be coordinated alongside your retirement accounts.

The Bigger Point: Optimize the System, Not One Tax

This is really what good tax planning should accomplish.

A business owner may have:

• a CPA trying to minimize taxes,

• a payroll company processing wages,

• a retirement-plan administrator designing a plan,

• a financial advisor managing investments, and

• an attorney handling the legal structure.

Every one of those professionals can give perfectly reasonable advice within their own lane.

The problem occurs when nobody is looking at the intersections.

Your business entity affects payroll.

Payroll affects compensation.

Compensation affects retirement-plan contributions.

Retirement contributions affect taxable income.

Taxable income affects your broader retirement strategy.

And the decisions you make today affect the accounts you’ll eventually draw from in retirement.

Your tax return, business entity, payroll, retirement plan and investment strategy aren’t five separate planning problems.

They’re one planning problem.

So if you’re over 50, self-employed, earning $250,000 or more and have no employees, don’t automatically assume the retirement plan you’ve always used is still the right one.

Ask a better question:

Given my age, income, business structure and retirement goals, how much could I reasonably save—and which retirement-plan structure gives me the best combination of tax efficiency, flexibility and simplicity?

That conversation may lead right back to a SEP IRA.

It may lead to a Solo 401(k).

Or it may lead to a much more sophisticated combination of strategies.

The important thing is that you actually have the conversation.

Important Tax and Retirement Plan Disclaimer

This article is for general educational and informational purposes only and is not intended as individualized tax, legal, investment, actuarial or retirement-plan advice.

Retirement-plan contribution limits, income thresholds, catch-up provisions, tax rules and other dollar amounts are subject to change, often annually. Plan eligibility and contribution calculations also depend on individual circumstances, business structure, compensation, plan documents and applicable law.

Before establishing or changing a retirement plan or making contributions, verify current rules and limits with the IRS and consult with your tax professional and, when appropriate, a qualified retirement-plan administrator or other professional advisor.