By Jason Watson, CPA
Posted Monday, March 30, 2026

If you want your retirement savings to grow tax free, you need a Roth IRA or Roth 401k. But don’t get too hung up on the phrase tax free growth. Roth IRAs and Roth 401k’s are not for everyone, and tax deferral today (non-Roth investments) might be the better answer as alluded to earlier (see Tax Savings and Tax Deferrals). Let’s back up the truck a bit and chat about the Roth tag on an IRA or 401k. Yes, a Roth IRA is different than a Roth 401k. The words have dramatically different meanings.

The 401k and traditional IRA came about because it was theorized that you had a much higher marginal tax rate during your wage-earning years than you would during retirement. For example, you could easily be in the 22% marginal bracket when you are 55, but be in the 12% bracket when you are 70. So, you would save taxes at 22% and pay them back at 12%. Not bad. This theory still holds true for hundreds of thousands of Americans but there have been some recent hiccups.

The data were shifting and suggested that the delta between wage earning marginal tax rate and retirement marginal tax rate was waning. So, some smart people got together and passed laws allowing the Roth IRA. Specifically, it was Senator William Roth from Delaware in 1997 who passed the legislation. Thankfully not much was going on in Delaware in the 90s and Senator Roth was able to create this excellent legislation. As you might be aware, the Roth IRA allows you to take after-tax dollars and invest it, and when you take the money out all of it is tax-free. Beauty!

So, the Roth IRA is not a tax deferral system like a traditional IRA. It is a pay tax now and avoid paying tax later system. But all that glitters is not gold as Robert Plant would say. A Roth IRA is only available to those who earn less than $252,000 per year for married filing joint taxpayers ($169,000 for single taxpayers) for the 2026 tax year, and a Roth IRA has very low contribution limits of $7,000 (for the 2026 tax year). Yuck. Now what?

Enter the Roth 401k which is a hybrid of a 401k and a Roth IRA, and can be a great selection among the small business retirement options. All the taste of a Roth IRA without the calories. Starting January 2006, many businesses amended their 401k plans and started introducing Roth options. So, even if your small business doesn’t adopt a 401k plan, your spouse’s job or your main job might benefit from the Roth 401k. Ask your benefits administrator to see if your other job or your spouse’s other job offers the Roth 401k option.

A Roth 401k has no income limitations and employees (you) can defer up to $24,000 (for the 2026 tax year) or $31,500 with catch-up. But business contributions cannot be designated as Roth. Since the business (employer) matching or profit-sharing is a deduction to the business, these funds are considered pre-tax and will not enjoy tax free growth. In other words, your contributions as an employee may be designated as after-tax or Roth type contributions, and the business’s contribution will be automatically designated as pre-tax or traditional type contributions.

Note: The SECURE Act of 2022 allowed for employer contributions to be post-tax (Roth). Many 401k plans are outdated and don’t allow for this, and need to be restated.

In essence, the Roth 401k has two accounts which can be managed separately within the 401k plan; one after-tax and another pre-tax.

Since the biggest challenge in deciding on using a Roth IRA or Roth 401k pivots on your marginal tax rate during retirement, and crystal balls don’t have the accuracy they used to, a good plan is to hedge against both. A Roth 401k has this feature built-in. Your deferrals as an employee can be Roth (post-tax) which hedge against retirement tax rates being similar to wage earning tax rates. Conversely, business funds are traditional (pre-tax) and hedge against retirement tax rates being lower than wage earning tax rates. Got it? How about this-

The mix between the two is the challenging part. 80% Roth and 20% pre-tax? 60-40%? Truly depends on your vision of retirement and your income sources. Bunch of rental income and residual earned income? Rich parents leaving you with thousands of dollars in dividend income? Gotta coin to flip? Two out of three? As mentioned earlier, financial planning and tax projections are the starting point for an answer that will unfortunately take a lifetime to validate. We can see your headstone now- “Her tax projections hit a 95% confidence interval. Kids are proud.” Small font or big stone. You decide.

Therefore, be careful of anyone telling you to always max out your Roth contributions without at least asking questions. Yes, there are zillions of calculators available on the internet- simply search for “ira versus roth ira calculator” and the inundation will be overwhelming. Or perhaps underwhelming.

Historically Roth options on a 401k plan used to be costly, but thanks to Adam Smith and his concept of economics, fierce competition has driven the pricing down. Many of WCG CPAs & Advisors small business owners leverage eTrade for their 401k plan.

By Jason Watson, CPA
Posted Monday, March 30, 2026

The i401k, solo 401k, solo k, uni k, or owners-only 401k (or whatever marketing name a bank or securities firm is selling) is a great small business retirement plan for-

• a one-person show,

• a one-person show with a spouse who also works for the business, or,

• a group of members in a multi-member LLC that does not have any employees. The Economic Growth and Tax Relief Reconciliation Act of 2001 modified the contribution limits and rules, and allowed for an emergence of the owners-only 401k plan.

Due to special tax rules, you can contribute more to this type of plan than other comparable retirement plans. The previous table in the beginning of this chapter illustrated this point with real life numbers. Under the usual rules for defined contribution plans such as SEP IRAs and profit-sharing plans, the deductible contribution is capped at-

• 25% of your salary or 20% of your earned income (as adjusted), or

• $71,000 for the 2026 tax year (plus $7,500 for catch-up) whichever is more restrictive.

But your deferrals as an employee into your solo 401k plan do not count towards the 20% and 25% caps, and this rule extends to your spouse. This is why the owner-only or solo 401k plan allows for the largest contribution because you have three sources of funding-

• You at $24,000 (for the 2026 tax year) plus $7,500 for catch-up (employee deferral), and

• Ditto for your spouse, and

• The business contribution up to 25% of your W-2 compensation or 20% of your self-employed earnings, and

• The funding is independent of each other (deferrals are deferrals, and contributions are contributions).

Read that again. Let’s say you have a $60,000 salary, $39,000 to invest into retirement savings and you are married. If only one person draws a salary, he or she can only defer a maximum of $24,000. But if a married couple pays a $30,000 salary to each person, then the total retirement deferral can be $48,000 without having to increase salaries to allow for a larger business contribution.

With a SEP IRA, in contrast, you would need a 4 x $48,000 or $192,000 salary to make the same retirement contribution (alternative math is $48,000 from the example above divided by 25%). The increase in payroll costs would wipe out your returns for at least two years. Not good. We’ll talk more about why a SEP IRA is used for crisis management and not for self-employed retirement plans (although the recent passage of the SECURE Act makes this moot, but we’ll explain anyway).

Here is an illustrative table showing this concept in a different way with salaries. This might not make the most sense in a rental property environment, but it gives you some things to consider-

Deferrals and contributions are discretionary, so you can cut back as cash flow and objectives change. The deadline for funding the business (employer) matching or non-elective contribution to your solo 401k plan is the tax filing deadline for your business including extensions. So, if you are an S Corp, the business tax return (Form 1120S) is due March 15. But with a tax return extension you could delay the funding until September 15. However, sole proprietors have until April 15 (the tax return filing deadline) or October 15 (if you file an extension) to make his or her deposits.

Employee deferrals for corporations (such as an S Corp) must be deposited by the 15th of the following month. So, a March 27 paycheck for Q1 would require you to deposit employee funds by April 15, which is typically a slow day around the WCG office (kidding, we’re celebrating at the local taco bar).

These deadlines are true for all 401k plans (solo, company-sponsored, Roth option, Safe Harbor provision, etc.). However, there is more wiggle room and less scrutiny for when employee deferrals are deposited since discovery is a challenge (in other words, you won’t rat on yourself). To keep things simple and elegant, we recommend following the same schedule as “big person” 401k plans.

As a side note, there is nothing saying you cannot wait until Q4 to make all your deferrals into your 401k plan, or any other quarter where perhaps a little bit of market timing or dollar cost averaging might be beneficial. Being the boss gives you flexibility with your small business retirement options.

Side Note: There is nothing saying you cannot wait until the last few months to make all your deferrals into your 401k plan, or any other quarter where perhaps a little bit of market timing or dollar cost averaging might be beneficial. Being the boss gives you flexibility with your small business retirement options.

Sidebar to the Side Note: Be careful about running out of room on your last few paychecks of the year. If you are paying yourself $60,000 a year or $5,000 a month, your November and December paychecks will be $10,000 and will not have enough room for a one and done $24,000 (for the 2026 tax year) employee 401k deferral. Then again, nothing that a bunch of payroll amendments can’t solve. Yeah, that sounds cheap and easy.

Unlike company-sponsored 401k plans, the individual or solo 401k plan does not need to perform discrimination testing of highly compensated employees (HCEs). More on that in a bit.

Solo 401k plans are also very economical to administer, allow for attractive retirement savings for you and your spouse, and remain simple enough to avoid all the hassles of a full company-sponsored plan. A company-sponsored plan (in contrast to a solo 401k plan) will cost about $1,000 to $1,500 per year (as of May 2026, WCG CPAs & Advisors has 90 team members and our 401k plan with Sure401k, a sister company to SurePayroll, was about $1,900 annually).

However, most solo 401k plans only charge for the commission or sales charge of the investments. For example, if you invest in A share mutual funds, there is a one-time sales load or commission of 5.75% (which might vary a bit between funds and fund classes). On that particular investment there are not any additional commissions, and the account fees are very small or non-existent. A shares (as opposed to C shares) are desirable for long-term investing since the commission paid is a one and done, and this cost is essentially amortized over several years.

The only downside is you cannot have a solo 401k or an owners-only 401k if you have employees. Even one part-time admin might blow this up depending on their hours and years of service (see below).

By Jason Watson, CPA
Posted Monday, March 30, 2026

Many taxpayers walk into our offices at WCG CPAs & Advisors and tell us they want to pay fewer taxes. Who doesn’t? We usually chuckle, and tell the client that he or she is the only one and it is sooooo refreshing to hear someone want to pay fewer taxes. Sorry for being snarky, but taxes are a way of life. Yes, our job is to have you pay the least amount of taxes permitted by law and not a dollar more, but that isn’t the only objective.

Tax savings comes in four variants- you can lie, cheat and steal, or you can understand the allowances, deductions and credits alongside the wiggle room afforded by the IRS code. We prefer the latter of course although the audit rate risk of 0.4% for S Corps and partnerships makes it all too tempting. Darn laws and ethics!

However, notice how 401k plans, IRAs, and other tax-deferred vehicles are not listed as one of the four ways to save taxes within self-employed retirement plans. A tax deferral is not automatically a tax-savings technique- it might be. It might not be. In true accountant fashion, it depends.

This is a real-life case- we have two Boeing engineers who saved about $1 million in the company 401k plan. The employee deferrals were all pre-tax, so they avoided about $250,000 in taxes since they were in the 25% marginal tax rate. Not bad.

However, they currently have four children, a house mortgage, and the usual tax deductions of a household of this size and age. When this couple retires in 2026, their marginal tax rate will increase to 32% due to their pension income and other income sources, and the dramatic reduction in tax deductions and credits

So, they saved at 25% and they will pay it back at 32%. Bummer. But wait! There is more to the story. Just like Paul Harvey, there is a page 2, or in the case of this book, on the next page. Yes, we are dating ourselves by referring to Paul Harvey but when that is all your parents listened to in the car, it is hard to forget.

What about all tax deferrals? Where does that money go? Usually to buy stuff like cars, vacations, food, and other consumables which don’t offer a return on investment. But what if this same couple invested the current tax deferrals into a conservative portfolio which yields a nice 5% rate of return (after tax consequence)? Things tilt in their favor- so we are back to having a tax benefit from tax deferrals. Huh?

The following is a ridiculously overly simplified table to demonstrate what we are talking about. Here are the assumptions-

• Defer $24,000 (for the 2026 tax year) per year for 10 years.

• Marginal tax rate is 22% during wage earning years.

• Rate of return on investing tax deferral savings is 5% net of taxes.

A quick recap- you deferred $240,000 and deferred $52,800 in taxes. That deferral grew to $69,716 because you invested it in a safe 5% investment portfolio. Great. What does this do?

Here is the realized savings for a 22% marginal tax rate during retirement-

If your marginal tax rate remains the same at 22% you still see a savings of $16,916 as shown above. Again, this is predicated on you taking the tax you normally would have paid and investing it wisely. Not all of us are this disciplined.

But if your marginal tax rate increases from 22% to 35%, your savings is zero. Granted, to jump 13% in marginal tax rate between wage earning years and retirement years seems rare, but you get the point.

The moral of the story is this. Yes, tax deferrals can lead to tax savings, but you must work the system and be disciplined. Not just today, but for several years, and you need a jump in marginal tax rate that is 9% or less (in general). Assuming you have an increase at all. See below-

The bummer of this table is the leap from 22% to 32% marginal tax rate. Recall that you deferred tax at the 22% marginal tax rate. If you pay it back at 22%, then you are golden. You pay it back at 32% (the next marginal tax rate), then you lose money.

What should you do? Financial planning and review with your financial advisor is a must. Generally, we see people in the 10 and 12% marginal taxes doing post-tax (Roth). We see people in the 32, 35 and 37% marginal tax rates doing pre-tax. Then, we see people in the 22 and 24% marginal tax rates doing a mixture of post-tax and pre-tax retirement contributions.

We’ll talk about the built-in hedge with the employer (your business) contributions which must be pre-tax. In other words, your 401k deferrals are Roth (post-tax) and your employer contributions are pre-tax. This combination is a great hedge.

There is also the RMD angle. RMD is a common TLA (three letter acronym) tossed around at bingo parlors and country clubs, and stands for required minimum distributions. In a nutshell, the IRS forces you to take out a portion of your pre-tax retirement savings every year so they can collect on the IOU you gave them several years ago.

RMD calculations are simple. You take your age, find your life expectancy factor and divide that into your aggregate pre-tax account balance. Do you remember science class and discussing a molecule’s half-life? RMDs are very similar- over the course of retirement, you must withdraw pre-tax retirement dollars, but the calculus doesn’t force you to take it all out over your lifetime. It always has some factor of your age, and depending on your frugality you might die with a pile of money since the minimum leaves behind a lot.

The IRS released updated life expectancy tables and distribution periods in November 2020. The last time this was done was nearly 20 years ago! Here is snippet of the IRS RMD table which can be found in the appendix of IRS Publication 590-B (the most recent is for the 2022 tax year)-

So, if you are 75 years old and had $1M in pre-tax money, your RMD would be $40,650 ($1,000,000 divided by 24.6).

What does this have to do with tax deferrals becoming tax savings? At some point you die, and if you only take out the minimum amount from your accounts, you will die with money in the bank. And this now-inherited IRA, for example, is taxed at your heirs’ rate. Under the new SECURE Act from December 2019, distributions from inherited IRAs to individuals other than spouses must be fully distributed in 10 years. There are some exceptions and other issues such as disabled individuals and minors, but that is the general gist.

The IRS wants to collect your previous IOU to them, like a Vegas bookie, and they don’t want to watch you keep kicking the can down the road.

So, for you there is tax savings built into the RMD system since not all the money is taken out and taxed. If you add in your heirs’ marginal tax rates, perhaps this changes from a “family unit” perspective. Heck, you’re the dead person- let your kids worry about your taxes by assuming them as their own. It takes a while to payback for all those sleepless nights and stinky diapers, but eventually it happens.

All kidding aside, here is something to consider- with life expectancy well into the 90s, your children might be retired too when you pass. Crazy but realistic, especially if you had kids before you had a career.

By Jason Watson, CPA
Posted Monday, March 30, 2026

Most people have a pretty good handle on personal finance and basic retirement savings, and while the principles are generally the same in the small business world, a lot of business owners have a deer caught in your headlights at 2:00AM look when it comes to leveraging their business for retirement. And there is good reason- retirement planning within your small business carries a bunch more options and potential pitfalls (sounds like life in general, doesn’t it?).

Reasons for Small Business Financial Planning

There are three major wealth considerations for small business owners (or anyone for that matter)-

• Accumulation (fun and exciting part)

• Preservation (the tricky part)

• Transfer (the necessary evil part)

Each of these major wealth considerations are interwoven, needs comprehensive focus to ensure the necessary dots are connected, and should have no gaps or holes exist during transitions. That is where financial planning comes into play.

Accumulation is easy. Most people think if they toss some money at a mutual fund they are planning for retirement. Nope.

Preservation gets tricky since we need to have our money outlast our lives. And with people living well into their 90s, this can be tough. Let’s put it another way- if you work for 40 years, from age 25 to 65, you need to save enough to live for another 25-30 years. That is incredible. If you are spending $100,000 at age 55, you better be making $180,000 and putting the $80,000 into a moderate growth retirement vehicle.

Preservation also includes proper insurance, asset protection through trusts, pro-active maneuvering and other tools in the toolbox.

Transfer of wealth is automatic. We have yet to see a hearse with a trailer hitch. Or, said in a completely starker way, every life comes with a death sentence. How it is executed is partially up to you. Did we just ruin your appetite? Sorry.

Transfer of wealth can also be tricky. The current federal estate tax exemption is $12.92 million (for the 2023 tax year) per person, and a passed spouse can posthumously port his or her exemption to the surviving spouse. Not bad. And most people don’t have over $26 million in estate value. Rich people problems (now referred to as high net worth… the most over-used and water-downed phrase today).

Sidebar: According to a November 2019 Forbes article, over $30 trillion in wealth will be transferred by baby boomers. Furthermore, according to a 2018 study from Bankrate.com, millennials are less inclined to invest in the stock market. So, where this wealth goes is certainly unclear.

These federal exemption amounts are indexed each year, and while Congress can always vote to repeal, this estate tax exemption was written in stone with passing of the American Taxpayer Relief Act of 2012. However, various states have much lower exemptions. For the 2022 tax year, Connecticut was $9.1 million, Hawaii was $5.5 million, among other examples.

Nebraska does not have an estate tax, but they do have an inheritance tax (the recipient pays depending on relationship and could be as high as 13%). California, the class favorite, is one of 33 states that do not impose an inheritance tax. Apparently, you’ve been taxed to death and there is nothing left to tax when you die in California.

Therefore, just because you are out of woods federally, doesn’t mean the transfer your wealth is free of taxation. Get a plan.

What about your business? Does it have an exit strategy or wealth transfer strategy? Businesses are like marriages; easy to get into, hard to get out. Add this to the plan.

The reasons for financial planning are-

Goals and Objectives

Define your goals and objectives, determine your current position and discover unmanaged risks. This sounds simple and makes sense, but defining goals and objectives is a fluid concept. They change. And as they change, the plan needs to be malleable enough to adapt. Financial plans are modified annually or whenever a major life change as occurred, whichever is more frequent. This is important.

The Plan

Financial plans also create a blueprint and chart a course on how to reach goals and objectives while managing risk. Again, this sounds simple. But even the most basic house needs a blueprint for framers, plumbers, electricians and even inspectors to review and implement. And in the case of a financial plan, these same players are your financial advisors, tax professionals, attorneys and insurance specialists.

Accountability

Financial plans also provide confidence, measure success and hold everyone accountable. If everyone agrees that your financial plan will ensure financial security in your life, then it becomes a measuring stick for determining success along the way. Anyone can throw some money at an investment, but what does it mean? And does it fit the plan? And is the selection of that investment meeting the plan’s objectives.

WCG CPAs & Advisors can always assist you with retirement and financial planning as it relates to your small business and taxation. If you need a referral for a financial advisor, we might be able to help with that too. However, we have fallen out of favor with a lot of the assets under management fee schedules, so we have trouble endorsing an advisor since most charge a percentage based on your asset values. We are not quite sure how the size of your portfolio translates into time and expertise, and in turn the value for services provided, but we digress.

Small Business Retirement Plans Comparison

We are going to put the carriage in front of the horse, and show you a comparison of basic small business retirement plans before explaining each plan. We cheated, and used Pacific Life’s online calculator to demonstrate these differences. Why re-invent the wheel? And frankly, they do a fantastic job at this type of stuff. Here is their link-

wcginc.com/6103

We took a handful of salaries (for corporations including S corporations) and net incomes (for sole proprietors and partners in partnerships) and plugged them into Pacific Life’s calculator, and came up with the following table based on the 2026 tax year limits-

Note the bolded $71,000 number. This is the maximum defined contribution amount permitted in 2026 per plan (and Yes, you can have two plans- we’ll talk about Greg and his two plans in an example later).

Crazy! The following are some quick observations-

• The maximum you can contribute to a qualified retirement plan is $71,000 for the 2026 tax year. You can go above this with a defined benefits pension (cash balance)- more on that later.
• Partnerships (those required to file Form 1065) follow the same limits as Sole Prop above.
• $190,000 in W-2 salary from your C Corp or S Corp is the magic number for maximizing your 401k. After that, any increase in salary does not help. Your fastest way to reach your contribution limit is through a 401k plan.
• $285,000 in W-2 income from your S Corp is the minimum salary for a max SEP IRA contribution.
• $372,000 from your small business or K-1 partnership income from your Schedule E as reported on your individual tax return is the magic number for maximizing your SEP IRA contribution. SEPs are old school and used for crisis management rather than planning (more on that too).
• Earned income from a sole proprietor is net profit minus 50% of your self-employment (SE) tax minus your contribution. Since the contribution actually adjusts the maximum contribution, this can be a circular reference. And No, 401k or SEP contributions do not reduce SE tax.
• 401k max is computed by taking $24,000 employee (you) contribution, plus 25% of your W-2 or earned income (as adjusted). This is for the 2026 tax year.
• SEP IRA max is computed by taking 25% of your W-2 or earned income (as adjusted).
• Max SIMPLE 401k is basically $17,000 plus 3% of your W-2 or earned income (as adjusted). Don’t spend too much time thinking about SIMPLE 401k plans.
• You can add $7,500 for catch-up contributions if you are 50 years old or older for the 2026 tax year.

Note: With the SECURE 2.0 Act, those aged 60-63 can do “super catch-up” allowing $11,250 versus $7,500 catch-up contributions into a 401k plan for the 2026 tax year. The $11,250 number is 150% of the regular catch-up limit, and in the case of a 401k plan, that is $7,500. If this should change, the super catch-up automatically adjusts.

Let’s talk about each of these qualified plans in turn, starting with the 401k. Out of the box, or non-traditional retirement plans will follow (profit sharing plans, defined benefits pensions, cash balance plans, Section 79 plans, etc.). Exciting!

By Jason Watson, CPA
Posted Monday, March 30, 2026

Rental property retirement planning might not be very exciting since most real estate investors and rental property owners view retirement through a lens of rental income and property appreciation rather than traditional investments in IRAs and 401k plans. However, from time to time, WCG CPAs & Advisors chats with a rental property owner who wants to contribute to a solo 401k plan.

The problem is simple- you generally need income that is subject to self-employment taxes (aka, Social Security and Medicare taxes). Rental income short of hotel-like operations is passive by nature and even with the short-term rental loophole or real estate professional status, it is not subject to self-employment taxes and doesn’t allow for a 401k contribution.

What can be done? You need to change the color of money. While most people want to go from earned income to passive income, you need to hit the cross-town traffic and go the other way.

Ok, Jimi, now what? You would charge your rental properties a management fee that is usual and customary. 5-10% for long-term rentals, and perhaps 20-40% for short-term rentals. This is paid like any other management fee where money is paid from the rental checking account to your management company checking account. From there, you can contribute to a solo 401k plan.

However, this quickly creates three potential problems-

• Depending on your state and regulated industry rules, you might have to register your management company. This might be extreme, right? You could also consider the payments from the rental properties to your management company as consulting fees.

• You are now paying self-employment taxes of 15.3% unnecessarily. As such, if your 401k investments have a rate of return around 7.5%, it will take two years to recover from this additional tax. 401k contributions only reduce income taxes, and not self-employment taxes. Sure, the tax deferral might mitigate this unnecessary tax expense, but it remains a tax deferral and not a tax deduction or avoidance technique.

• You might easily run into a situation where your management fee or consulting fee creates a rental loss. However, that loss might be limited based on passive activity loss limits. The problem is that you are recognizing income from the management or consulting fee, and it might be phantom income. Sure, you can reduce this with a 401k plan contribution and Yes, your passive activity losses will eventually offset future rental profits or release upon sale, but be aware of the corner you might be painting yourself into.

For the 2026 tax year, you contribute $24,000 plus $7,500 for catch-up (those 50 years or older) to a solo 401k plan. If you have multiple rental properties, each activity would pay a separate fee to the management company, and then in turn, the management company would make a 401k contribution.

Keep in mind there are two pieces to the 401k contribution puzzle- your contribution plus the company’s discretionary contribution. A $30,000 management fee would convert into $26,190 in total 401k contributions ($24,000 for the 2026 tax year plus 20% of net earnings which has special calculations) leaving some taxable income. A $23,500 management fee would convert into $21,940 leaving no taxable income after considering the self-employment tax deduction.

Sidebar: If you think you are clever and use a management fee as a way to get around passive activity loss limits, you’ll run into trouble. What are we talking about? You pay out a management fee, and deduct your travel, home office and all kinds of expenses on Schedule C, Profit and Loss From Business, of your individual tax return. Creating recurring losses on Schedule C could trigger an IRS examination under hobby loss rules.

Armed with all that, the rest of this chapter is aimed at retirement planning for the small business owner, or the collector of management or consulting fees. This is a truncated chapter. For a complete review of small business retirement including controlled groups, multi-member LLC 401k plans, and other issues, please see our other book, Taxpayer’s Comprehensive Guide to LLCs and S Corps.

By Jason Watson, CPA
Posted Monday, March 30, 2026

Another twist. Let’s say you have a side business and a regular W-2 job where you max out your deferrals into the 401k plan. You cannot make employee deferrals to your side business solo 401k plan since you are collectively limited to $24,000 (for the 2026 tax year) or $31,500 with catch-up, but your business can make a discretionary non-elective contribution. Keep in mind that the total combined employee and employer contributions are capped at $71,000 for the 2026 tax year, with an additional $7,500 catch-up contribution allowed if you are age 50 or older.

Here is the word for word example from the IRS using 2016 limits of $18,000 as an example (occasionally they illustrate things well)-

Greg, 46, is employed by an employer with a 401(k) plan and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2016, $18,000. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $18,000.

He has enough earned income from his business to contribute the overall maximum for the year, $53,000. Greg can make a non-elective contribution of $53,000 to his solo 401(k) plan. This limit is not reduced by the elective deferrals under his employer’s plan because the limit on annual additions applies to each plan separately.

Good ol’ Greg. From the employer or business perspective, a discretionary non-elective contribution is in contrast to a matching contribution. This means that a contribution can be without the employee making a deferral. This is key since in the tidy IRS example above, Greg has max’d out his deferrals at his regular job, so he cannot make additional deferrals with his side business. However, the business can make a non-elective contribution.

A non-elective contribution means that the business’s contribution is not dependent on the employee’s deferral. Seems counter-intuitive. In other words, you do not put anything into the 401k plan, but your business can contribute up to 20% of your income from the business as a garden variety LLC (or 25% of your W-2 from your business if electing S Corporation status). These are also referred to as discretionary contributions.

Sidebar: The phrase profit-sharing contributions is sometimes used as well. However, this is like interchanging 401k and IRA. Technically, a profit-sharing plan is different than a 401k plan, and it can either be standalone or deployed in combination with a 401k plan.

Therefore, if a company has excess profits (cash) and wants to make a contribution to the 401k plan, these are considered discretionary non-elective contributions and not profit-sharing contributions. This is because a 401k plan is being used and not a profit-sharing plan. Our apologies for splitting hairs and getting all nerdy on the nomenclature.

In summary, the $24,000 (for the 2026 tax year) limit is your limit as a person. But each 401k plan has a limit of $71,000 (see the last line of the IRS example on the previous page using 2016’s limits) which can add a lot of muscle to your self-employed retirement plan.

No, you cannot add your W-2s together (main job and side job) and use that for the basis of your side job / business employer contribution. That would be nice though.

Warning! Each year a handful of small business owners neglect to let us know they picked up W-2 income on the side, and they also forget to inform us that they contributed to their “side W-2 gig’s” 401k plan. Yes, we ask. We ask often. Therefore, keep in mind that the $24,000 deferral limit into a 401k plan (for the 2026 tax year) is for all plans, combined.

By Jason Watson, CPA
Posted Monday, March 30, 2026

Two arguments abound when considering a pre-tax 401k contribution. The argument goes like this- your retirement tax rate will be lower than your wage-earning tax rate. For those in the 32%, 35% or 37% marginal tax brackets, this is likely true. However, those earning big bucks probably continue to earn big bucks during retirement from investments, real estate, consulting, etc.

The other argument is about the free loan from the IRS. If you contribute $31,500 ($24,000 + $7,500 catchup for the 2026 tax year) to your pre-tax 401k and you are in the 32% marginal tax bracket, you just put $10,080 in your pocket ($31,500 x 32%). Another way to look at this is that $31,500 only took $21,420 in cash.

Sure, at some point the IRS wants it back when you withdraw it during retirement and will tax the original contribution plus whatever you earned on it. But this might fall into the let’s worry about next time, next time category.

As such, the second argument is about using the IRS’s money to build additional wealth. You take your $10,080 and do something good with it. Yeah, this argument sort of works. $10,080 annually might not move the needles much on your wealth building strategies. You would need $10,080 x 10 years at 6% rate of return just to afford a down payment on an average rental property.

Rather, most wealth is built with after-tax dollars. The leveraging of the IRS free loan concept sounds great on paper until you gain perspective on the size of the lever.

Another side argument is completely avoiding state income taxes by reducing your state income and therefore income tax with 401k contributions during your wage-earning years, and then establish residency in a tax-free or a tax-friendly state during retirement.

The theories above make sense; however, we ask a basic question- is it easier to pay taxes during your wage-earning years or during retirement? Sure, it depends how much you withdraw during retirement. Please consider that to spend $150,000 during retirement, you might have to withdraw upwards of $180,000 to account for the income taxes.

During your wage-earning years you might have the ability to work a little harder to pay for taxes now. Pick up an extra shift. Close an extra deal. Get a few more tax returns out of the door if you are a tax accountant. Whatever it takes, right? During your retirement years, especially mid-70s or older, you pay taxes with retirement savings (or at least it feels like you do depending on your cash sources).

Also, keep in mind that your primary objective in life is to build wealth. Your second objective is to save taxes, and what a lot of people forget about is saving taxes is not done in a vacuum or just one year; it is done over your entire lifetime.

Finally, consider that the law of 72 suggests that your investments will double every 8 years. Huh? The average rate of return for the S&P 500 is 9.2% since inception. If you take 72 and divide it by 9 (the rate of return) this equals 8, and suggests that your investment will double in 8 years. Where are we going with this? If you have 2 or 3 “doubles” coming up, to have that growth be tax-free upon retirement might be nice.

As mentioned elsewhere, WCG CPAs & Advisors recommends financial planning by a qualified planner to determine your objectives and model your particular scenario.

By Jason Watson, CPA
Posted Saturday, September 28, 2024

Other benefits of having a 401k within your business include being able to consolidate other plan assets such as profit sharing, money-purchase plans, traditional IRAs and SEP IRAs into your 401k plan. You can gain some elegance with this- for example, often times your IRA will have both deductible and non-deductible contributions. You could roll the deductible contributions into your solo 401k plan and roll the non-deductible contributions into a Roth IRA or Roth 401k (a Roth conversion). No, Roth IRAs cannot be rolled into your 401k unless the 401k has a Roth option.

Another benefit comes from backdoor Roth conversions. When converting a non-deductible IRA contribution to a Roth IRA, all your IRAs are considered even the pre-tax (deductible) ones. Your conversion is subject to “pro-rata” rules which is summarized by SmartAsset.com as “if your traditional IRA contains both pre-tax (deductible) and after-tax (non-deductible) contributions, the Pro-Rata rule dictates that your Roth conversion will be taxed proportionate to your pre- and post-tax percentages.”

Therefore, a solution is to take all your pre-tax IRA contributions and roll them into your solo 401k plan. This leaves only the after-tax contributions behind which can then be converted to Roth without tax consequences.

Some words of caution. Rolling old IRAs and such into your shiny new self-employed 401k plan might not be the best idea. In some cases, the rollovers will be captive or trapped in the 401k plan. For example, let’s say you have a $50,000 IRA and you move it into your 401k. Two years later you have a crisis and need to access the $50,000. Your 401k plan might not allow you to withdraw this money without a hardship provision, have an in-service rollover or allow loans against the plan assets. These features, or some would say are poorly documented limitations, vary among plan providers.

Another concern is the filing of a 5500-EZ tax form. This is not a massive problem, but once your 401k plan reaches $250,000 in plan assets, you must file a 5500-EZ each year.

Also, 401k plans (beyond the solo 401k plans) might have higher fees and fewer options. In our observation, many 401k plans have an annual asset management fee of 1.5% to 3.0% of assets, whereas most IRAs (and solo 401k plans) operate for less than 1.5% annually. There are kickbacks from the asset managers to the 401k plan administrators which is why you see some administrators like Wells Fargo offering free 401k plans.