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Retirement plans are one of the few places in the tax code where the IRS is on your side. Contributions reduce current-year income, the money grows tax-deferred (or tax-free, with Roth), and you can pull it out in retirement at typically-lower rates. For small business owners the leverage is even higher: contribution limits stack much higher than for W-2 employees, and the right plan structure can shelter $70,000+ per year per owner.
Here is how the major retirement plans work in 2026, what the contribution limits are, the rules for IRAs (Traditional, Roth, Spousal), how to handle early withdrawals, and how to use Qualified Charitable Distributions after age 70½ to reduce taxes during retirement.
Small business owners have five main retirement plan options, ranging from simple to complex. The right one depends on income level, whether you have employees, and how much you want to contribute each year.
2026 limits are published each year by the IRS in late fall (typically IRS Notice 2025-XX). Confirm current year amounts at irs.gov/retirement-plans/plan-participant-employee/retirement-topics-contributions.
For 2025, the IRA contribution limit is $7,000 for taxpayers under age 50 and $8,000 for those age 50 and older. The 2026 limit is announced in IRS guidance each fall — confirm at irs.gov.
Important details:
If you missed contributing for a prior tax year and have not yet filed, you can still contribute up to April 15 and apply it to last year. After April 15, the window closes for the prior year.
Yes, via the Spousal IRA rule. A spouse with little or no earned income can still contribute to an IRA based on the working spouse’s compensation, as long as the couple files a joint return.
The combined household IRA contribution can be up to two times the individual limit (so $14,000 for 2025 under age 50, or $16,000 if both spouses are 50+). The earned-income spouse must have earned at least that much to support both contributions. Each spouse owns their own IRA in their own name — the “Spousal IRA” is just the rule that enables the funding.
This is one of the more underused planning levers for households with one stay-at-home parent or one spouse who recently retired. Even modest annual contributions stack meaningfully over 20-30 years of tax-deferred growth.
A 401(k) is an employer-sponsored retirement plan that allows employee pre-tax (or Roth) contributions plus employer matching or profit-sharing contributions. For 2025, employees can defer up to $23,500 (plus $7,500 catch-up if age 50+, or up to $11,250 catch-up under SECURE 2.0 for ages 60-63).
Combined employee + employer contributions cannot exceed $70,000 for 2025 ($77,500 with age 50+ catch-up). For small business owners, this stacking is the key advantage over IRAs — you can shelter much more income.
For solo business owners or owner-spouse-only businesses, a Solo 401(k) is usually the strongest option: it allows the full employee deferral PLUS the employer profit-share (up to 25% of compensation for incorporated entities, or about 20% of net SE earnings for unincorporated). A 50-year-old solo business owner netting $300,000 can typically contribute $70,000+ to a Solo 401(k) — significantly more than the same person could in a SEP-IRA at the same income.
If you have employees, the regular 401(k) (or Safe Harbor 401(k)) is more administratively complex but lets you offer the benefit company-wide. The SECURE 2.0 Act now allows long-term part-time employees to participate after two years of 500+ hours, expanded from three years previously.
Yes, and SECURE 2.0 made this much easier. Starting in 2024, employers can treat qualified student loan payments as if they were employee 401(k) contributions for purposes of matching. The employee makes a student loan payment, the employer makes the matching contribution to the employee’s 401(k), and both sides get the tax benefit they would have if the employee had made the 401(k) contribution directly.
For employers competing for talent — especially younger employees with student debt — this is a meaningful benefit at little incremental cost. The match is the same amount you would have paid anyway; you are just allowing the employee to direct effort toward student loans instead of 401(k) contributions, while still building retirement savings.
Withdrawing from an IRA or 401(k) before age 59½ generally triggers a 10% early withdrawal penalty on top of regular income tax. The IRS recognizes 11 specific exceptions to the penalty:
Even when an exception applies and the 10% penalty is waived, regular income tax still applies on the distribution (with the exception of Roth contributions, which are tax-free as long as they meet the 5-year holding requirement). Always model the total tax impact before pulling from retirement early.
A Qualified Charitable Distribution is a direct transfer of up to $108,000 (2025 limit, indexed for inflation) per year from an IRA to a qualified public charity, available to IRA owners age 70½ or older. The transfer counts toward the owner’s Required Minimum Distribution (RMD) but does NOT count as taxable income.
For retirees who would normally take the standard deduction (and therefore can’t deduct charitable gifts on Schedule A), the QCD is the most tax-efficient way to give. The donation reduces taxable income directly rather than being deducted, which also helps with Medicare premium tiers, Social Security taxation thresholds, and other AGI-sensitive thresholds.
Rules to follow:
For couples doing year-end giving in retirement, the QCD combined with a normal RMD can shelter substantial income from taxation while satisfying the RMD requirement. Pair with a charitable giving strategy for the most tax-efficient retirement-phase giving plan.
Required Minimum Distributions are mandatory withdrawals from most retirement accounts starting at age 73 (raised from 72 by SECURE 2.0, and scheduled to rise to 75 in 2033). The IRS forces you to begin paying tax on retirement savings at some point, since the funds were contributed tax-deferred for decades.
RMD amounts are calculated annually based on the prior year’s December 31 account balance and an IRS life-expectancy table. For most retirees this works out to roughly 3.5-4% of the account in the first RMD year, rising as you age. Failure to take the RMD triggers a 25% penalty on the missed amount (reduced from 50% by SECURE 2.0).
Roth IRAs do NOT have RMD requirements for the original owner (a SECURE 2.0 update for Roth 401(k)s as well). This makes Roth accounts especially valuable for estate planning purposes — you can let them compound untaxed until death.
The right plan depends on three factors: how much you want to contribute annually, whether you have employees, and how much administrative overhead you can tolerate.
The wrong plan choice costs years of compounded under-contribution. The right plan, sustained over 20-30 years, can shelter $1M-$3M+ from federal income tax over a working career for high-earning small business owners. See our $150K+ Texas earner tax strategy guide for the broader high-income planning framework.
If you have not yet picked a retirement plan structure for your small business — or you have one and are not sure it is still the right fit as your income has grown — let’s run the math for your specific situation. The decision deserves more than a quick “I have a SEP-IRA, that’s good enough.”
Until next time.
The 2025 IRA contribution limit is $7,000 for taxpayers under age 50 and $8,000 for those age 50 and older. Contributions can be made up through April 15 of the following year and applied to the prior tax year. The 2026 limit is announced by the IRS each fall — confirm current-year amounts at irs.gov.
Yes, via the Spousal IRA rule. A spouse with little or no earned income can contribute to an IRA based on the working spouse’s compensation, as long as the couple files jointly. Combined household contributions can reach $14,000 in 2025 (or $16,000 if both spouses are 50+), with the working spouse’s compensation supporting both contributions.
The IRS waives the 10% early withdrawal penalty in 11 specific situations: death or disability, substantially equal periodic payments (72(t)), medical expenses exceeding 7.5% of AGI, health insurance premiums for the long-term unemployed, qualified higher-education expenses (IRA only), first-time home purchase up to $10,000 (IRA only), birth or adoption up to $5,000, IRS levy, military reservist active duty, domestic abuse victim withdrawals up to $10,000, and federally-declared disaster distributions up to $22,000. Regular income tax still applies on the distribution.
A QCD is a direct IRA-to-charity transfer of up to $108,000 (2025) per year, available to account owners age 70½ or older. The distribution counts toward the year’s Required Minimum Distribution but is NOT included in taxable income. The funds must transfer directly from custodian to charity; routing through your bank account first disqualifies the QCD treatment.
For most solo business owners (no employees), a Solo 401(k) wins on contribution capacity. It combines an employee deferral up to $23,500 in 2025 with an employer profit-share, reaching a combined $70,000 cap ($77,500 with age 50+ catch-up). SEP-IRA is simpler administratively but caps lower at the same income level. Defined-benefit plans push contributions higher (often $200K+) for very high earners but with significantly more administrative overhead.
Adam Traywick, CPA is the President and founding CPA of Adam Traywick, LLC, a Fort Worth small-business accounting firm. He has over 20 years of experience helping small business owners across home-services trades, hair salons, real estate, and insurance agencies optimize taxes, run cleaner books, and avoid the surprises that come from once-a-year accountants.
