Written by Here’s something I tell every business owner I work with. The U.S. tax code is not a punishment system. It’s an incentive system. Uncle Sam uses the tax code to encourage behavior he wants to see… real estate investment, charitable giving, job creation, innovation. And if you’re willing to do those things, the government will reward you with tax breaks.
Business owners are at the top of that incentive list.
- You took a risk.
- You created jobs.
- You built the tax base that funds government programs.
Uncle Sam recognizes that, and the tax code reflects it. If you know where to look. Here are the tools business owners have that W-2 employees simply don’t.
Solo 401(k) — For the One-Person Shop
The Solo 401(k) is exactly what it sounds like: a 401(k) designed for self-employed individuals with no full-time employees. (Your spouse is the one exception. They can participate without disqualifying the plan.)
What makes it powerful is that you get to contribute from two roles simultaneously:
- As the employee: you can contribute up to $23,500 in 2026 (or $31,000 if you’re 50 or older, thanks to catch-up contributions)
- As the employer: you can contribute up to 25% of your net self-employment income on top of that
Together, these can stack up to $70,000 per year in total contributions. That’s significantly more than a standard workplace 401(k).
And here’s what a lot of people don’t know: the Solo 401(k) can be structured as Roth. That means after-tax contributions that grow completely tax-free. Something traditional SEP IRAs don’t offer. If you’re in a position to contribute and you’re in a lower income year, the Roth Solo 401(k) is worth serious consideration.
SEP IRA — Flexible for Any Business Size
The SEP IRA (Simplified Employee Pension) is one of the most straightforward retirement accounts available to self-employed people and small business owners. It’s simple to set up, easy to administer, and allows contributions up to $70,000 per year (or 25% of compensation, whichever is less).
The key difference from the Solo 401(k): if you have employees, you’re generally required to contribute the same percentage of compensation for them as you contribute for yourself. That makes it more appropriate for sole proprietors or very small businesses. It’s also entirely pre-tax. There’s no Roth SEP IRA option.
Used alongside a conversion strategy during lower-income retirement years, the SEP IRA can be a powerful tool for both reducing taxes now and building wealth for later.
Defined Benefit Plan — The Pension You Create for Yourself
This one is less common, but for the right situation, it’s the single most powerful retirement tax shelter available.
A defined benefit plan is essentially a private pension that you fund and control. Unlike a 401(k) or SEP IRA, where the contribution is defined. A defined benefit plan sets a target benefit (a specific monthly income at retirement) and works backward from there to determine how much needs to be contributed now.
For high-income earners over 50, the required contribution to fund the promised benefit can be massive. In some cases $150,000 to $300,000 or more per year. All of it tax-deductible.
The trade-off: defined benefit plans are more complex and expensive to administer. They require an actuary to calculate required contributions each year, and if investment returns fall short, you may need to contribute more the following year. But for a self-employed professional with a high income and limited time before retirement, no other vehicle shelters more money faster.
The QBI Deduction — 20% Off Your Business Income
The Qualified Business Income (QBI) deduction is one of the more overlooked tax benefits for small business owners. If you operate as a sole proprietor, partnership, S-corporation, or LLC, you may be able to deduct up to 20% of your qualified business income from your federal taxes.
That’s a deduction on your income itself. If your business earns $200,000 in net income, the QBI deduction could reduce your taxable income by $40,000 without changing a single thing about how you run your business.
Income limits and business-type restrictions apply, so not every business owner qualifies for the full deduction, and certain service-based businesses face phase-outs at higher income levels. But for those who do qualify, it’s one of the cleanest ways to lower your effective tax rate on business income.
Mega Backdoor Roth — Building Tax-Free Wealth on a Larger Scale
High earners often find themselves phased out of direct Roth IRA contributions based on income limits. The workaround most people know is the backdoor Roth. Contributing to a traditional IRA and converting it to Roth, bypassing the income limit entirely.
The mega backdoor Roth takes this further. Inside a Solo 401(k), contributions beyond the standard employee limit (up to the $70,000 total cap) can be made with after-tax dollars. Those after-tax contributions can then be converted to Roth within the plan.
The result: you can potentially move significantly more money into tax-free territory than any standard Roth contribution would allow up to $70,000 per year in total, with the after-tax portion growing completely tax-free from that point forward.
Not all 401(k) plans support this strategy, and it requires a plan document that explicitly allows after-tax contributions and in-plan conversions. Solo 401(k)s can often be structured to accommodate this.
Case Study: Marcus
Marcus is 54 and runs a successful consulting firm, earning $300,000 per year. He plans to sell the business in six years. He’d been contributing to a SEP IRA but hadn’t fully optimized his strategy.
By combining his SEP IRA (maxed at $69,000/year) with a new defined benefit plan (sheltering an additional $150,000/year), he was able to put nearly $220,000 per year beyond Uncle Sam’s reach.
Over six years, that’s roughly $900,000 sheltered from taxes. Generating an estimated $297,000 in tax savings before he ever gets to the business sale conversation.
The lesson: for business owners in high-income years with a finite runway before selling or retiring, these tools can compress decades of tax-efficient wealth building into a shorter timeframe.
The Bigger Picture
I want to say something to the business owners who are reinvesting everything back into the business and putting retirement planning on the back burner: I get it. Your business is your highest-returning investment, and there’s a logic to doubling down on what you know.
But from a risk perspective, having everything tied to one asset, even a thriving business… is a concentrated bet. Using some of your stronger years to fund a Solo 401(k), SEP IRA, or defined benefit plan doesn’t slow down your business. It builds a diversified financial foundation alongside it. And as a bonus, it reduces your tax bill in the years you need it most.
The year your business has a record-breaking quarter is exactly the year to pick up the phone and ask: is there anything we can do to keep more of this?
Until next time,
Dre Griggs, CFP® | Wisdom Equals Freedom
P.S. – Not sure how to maximize your minimize, while minimizing the risk? Take the Tax-Smart Retirement Stage Assessment for free. Go to obsidianwisdom.com/assessment