Most owners treat the company plan as an employee benefit and a cost. It is also the largest tax deduction most of them have access to.
Most owners think of the company retirement plan as an employee benefit. Something you offer because you have to compete for people. A cost.
That’s half of it. The other half is that it’s probably the single largest tax deduction available to you personally, and most owners are using a fraction of it.
In 2026, the total that can go into a 401(k) account for one person is $72,000, or $80,000 if you’re 50 or older. That’s your salary deferral, plus any match, plus profit sharing.
Your deferral is capped at $24,500 (or $32,500 with catch-up). So the deferral alone doesn’t get you close to the ceiling. The gap gets filled with employer money, which is where profit sharing comes in.
This is the piece I find most owners have never had modeled for them. With a properly designed allocation formula — new comparability is the common one — a plan can direct a disproportionate share of the profit sharing contribution to older, higher-paid participants, which in a lot of small businesses means the owner and one or two key people. The plan still has to pass testing, and there’s a real cost for staff, but the ratio is often far better than owners assume.
Then there’s the spouse. If your spouse works in the business in a genuine capacity and is paid a reasonable wage for actual work performed, they’re a participant like anyone else, with their own $72,000 ceiling. For a married couple who both work in the business, that’s up to $144,000 a year moving out of taxable income and into retirement accounts. The work has to be real and the pay has to be defensible — this isn’t a paper exercise, and it needs to be documented — but for a lot of businesses it’s legitimately available and simply unused.
Children on payroll is a related idea with different math. Paying a teenage child for real work in the business shifts income to a much lower bracket, and in a family-owned unincorporated business, wages to a child under 18 are generally exempt from Social Security and Medicare tax. Those wages can then fund a Roth IRA for the kid, which is about the best long-horizon account a 16-year-old can have. Again: the work has to be real, the wage has to be reasonable, and you need records.
This one is new for 2026 and a lot of people haven’t caught up to it. If your prior-year FICA wages from the employer sponsoring the plan exceeded $150,000, every catch-up dollar you contribute now has to go into the Roth side of the plan. No deduction. The administrative transition relief that delayed this expired at the end of 2025.
Two consequences worth knowing. If you’re an S-corp owner paying yourself W-2 wages above that threshold, this applies to you. And if your plan doesn’t offer a Roth feature at all, affected participants lose the ability to make catch-up contributions entirely — which is a plan design problem you want to find before someone tries to contribute, not after.
Worth noting: self-employment earnings aren’t FICA wages, so a sole proprietor or partner with a Solo 401(k) can still make pre-tax catch-ups regardless of income. The rule keys on W-2 wages specifically.
Most owners default to pre-tax on everything, and for high-income years that’s usually right. But there are years where it isn’t.
The years to watch for are the low ones. The year you take a big equipment deduction. A slow year. The gap years after you sell the business and before Social Security and required distributions start. In those windows, your marginal rate might drop into the 12% or 22% bracket, and that’s when converting pre-tax dollars to Roth costs you the least.
The strategy is straightforward in concept: convert enough to fill up a low bracket without spilling into the next one. Pay the tax now at a low rate so that money grows and comes out tax-free later. Done consistently across a few years, it can move a large amount of money out of a future tax problem, and it shrinks the required minimum distributions that would otherwise start at 73.
The reason this needs planning rather than reacting is that the good conversion windows are usually short and you have to see them coming. By the time you’re doing your taxes in March, the window closed on December 31st.
Here’s a problem that shows up in successful businesses. The owner has been diligent for fifteen years. Maxed the plan, put the profit sharing in, built up a real balance. And then they have almost nothing outside of it except cash sitting in a business checking account.
That creates two issues. The first is access. Money in a retirement plan is expensive to reach before 59½. If an opportunity comes up — a building, an acquisition, a competitor’s book of business — you’re either paying penalties or you’re not participating. The second is that a very large pre-tax balance is a future tax bill. At 73, required distributions start whether you need the money or not, and they can push you into a higher bracket and increase what you pay for Medicare.
So part of the work is deliberately building money in a taxable brokerage account alongside the plan. It doesn’t get the deduction, but it’s flexible, it gets favorable long-term capital gains treatment, and it can be borrowed against.
That last part is worth its own paragraph. A securities-based line of credit lets you borrow against a taxable investment account without selling the positions. For a business owner, that can be a bridge for a short-term need — covering payroll through a slow quarter, funding an opportunity before a receivable comes in — without liquidating investments and triggering capital gains, and often at a better rate than other short-term options. It’s not free money and it carries real risk if markets drop, since a decline can force a call. But it’s a tool worth understanding before you need it, not after.
The reason I lead with the plan is that it’s usually the biggest lever. But the reason owners end up working with me isn’t the plan.
Here’s how it typically goes without coordination. The CPA files the return in March and does it correctly, looking backward at a year that’s already closed. Somebody manages an investment account and doesn’t know anything about the business. An attorney drafted a will six years ago and hasn’t heard from anyone since. The 401(k) came from the payroll provider. Nobody has ever sat down and looked at all of it at once.
The result is decisions that are individually fine and collectively wrong. Deferring income into a year that turns out to be higher. Missing a conversion window because nobody was watching. A buy-sell agreement that doesn’t match what the business is now worth. Beneficiary designations still naming an ex-spouse, which override the will regardless of what the will says.
That’s the gap I mean when I say most owners are great at building the business but don’t have a plan for what the business is building for them.
If you want to know whether your plan is being used to your advantage, the fastest read is your last testing report and your own contribution total for the year. If your personal number is under $30,000 and the business is profitable, there’s very likely room.
Total annual additions to one person's 401(k) account are capped at $72,000 for 2026, or $80,000 at age 50 and older. The owner's own salary deferral tops out at $24,500, so reaching the full amount requires employer match and profit sharing contributions determined by plan design.
If your spouse performs genuine work for the business and is paid a reasonable wage for that work, they are a plan participant with their own contribution ceiling. For a couple both working in the business, that can mean up to $144,000 per year in combined 2026 contributions. The work must be real and the compensation defensible and documented.
Yes, if prior-year FICA wages from the employer sponsoring the plan exceeded $150,000. Beginning in 2026 those catch-up contributions must be made on a Roth basis. Self-employment earnings are not FICA wages, so sole proprietors and partners with a Solo 401(k) are generally not subject to this rule.
Send me your plan documents or last year’s returns and I’ll tell you what I see — whether or not you end up working with me.
Schedule a free 30-minute call →Retirement plan design for small businesses in Lansing →
Sage W. DeMull, PPC® is a fee-based fiduciary advisor at DeMull Financial, 2624 Lake Lansing Rd Ste 200, Lansing, MI 48912. Figures reflect 2026 IRS limits per Notice 2025-67 and are adjusted annually. This is general information, not individualized tax, legal, or investment advice — your situation may differ, and you should consult your own tax professional. Securities and advisory services offered through LPL Financial, member FINRA/SIPC.