At The Money: How to Max Out Your Small Business Retirement Plan

Key Takeaways

• SEP IRA and solo 401(k) are primary tax‑deferred options for owners
• Each retirement plan allows a $72,000 total contribution limit
• Solo 401(k) with Mega Backdoor Roth enables full $72k as Roth dollars
• SEP contributions cap at 20% of net earnings, needing high income
• Form 5500‑EZ filing required when plan assets exceed $250,000

Pulse Analysis

Small‑business retirement planning has entered a new era as side‑hustles and solo ventures proliferate. Traditional 401(k) offerings remain out of reach for many, but qualified plans like SEP IRAs and solo 401(k)s provide a tax‑advantaged pathway to build a sizable nest egg. The key advantage lies in the $72,000 aggregate contribution ceiling that each plan permits, effectively allowing entrepreneurs to stack multiple accounts across separate entities. When paired with a Mega Backdoor Roth, a solo 401(k) can funnel the entire limit into after‑tax Roth dollars, delivering tax‑free growth and withdrawal flexibility that most employees never experience.

The mechanics of each vehicle differ markedly. A SEP IRA ties contributions to 20% of net earnings, meaning high‑income owners—typically $350,000+—must generate substantial profit to hit the $72,000 mark. By contrast, a solo 401(k) blends employee deferrals (up to $24,500, $32,500 if over 50) with employer profit‑sharing, allowing lower‑income practitioners to reach the ceiling with less revenue, often around $235,000. The Mega Backdoor Roth leverages after‑tax contributions, converting them to Roth balances without the usual income limits. Compliance is not optional: once plan assets surpass $250,000, a Form 5500‑EZ must be filed, and penalties for non‑filing can reach $150,000, underscoring the need for diligent record‑keeping.

Practical implementation hinges on timing and structure. Both SEP IRAs and solo 401(k)s can be established and funded for the prior tax year if set up by April 15, with extensions stretching the deadline to October 15 for employer contributions. Spouses who are bona fide employees can double household limits, and multiple partners may share a solo 401(k) as long as no non‑owner staff are added. While solo 401(k)s lack the enhanced ERISA creditor protection of large‑employer plans, they still offer robust tax benefits. Entrepreneurs should partner with a qualified advisor to select the optimal plan, navigate filing obligations, and align retirement strategy with broader succession or exit goals.