S-Corp Retirement Plans: Solo 401(k) vs SEP IRA vs Cash Balance Plan

If you own an S corp, the retirement plan you choose has a real effect on your tax bill. I work with entrepreneurs and S corp owners every day, and I routinely see two owners with the same income end up with very different after tax results because one used the right retirement plan and the other did not.

This article compares the three main S corp retirement plans, the Solo 401(k), the SEP IRA, and the cash balance plan. It uses one example owner to show what each plan allows and what it could save in taxes.

The example: an S corp owner with a $150,000 salary

Sarah owns a marketing agency. She pays herself a $150,000 W2 salary, the business generates $350,000 in profit before her salary, she is 45 years old, and she has no W2 employees besides herself.

How S corp retirement contributions are calculated

One rule drives everything. In an S corp, employer retirement contributions are based on your W2 salary. Distributions and business profit do not count. Employer contributions can be up to 25% of W2 wages, which means salary planning is retirement planning. For Sarah, the $150,000 salary is the foundation for each plan.

Solo 401(k) for S corp owners

For most S corp owners with no employees, the Solo 401(k) is the best place to start. It has two contribution types, and these are the IRS maximums used in this example:

• Employee contribution (elective deferral): up to $23,000 if you are under 50, or $30,500 if you are 50 or older. It can be Roth or pre tax.
• Employer contribution: up to 25% of W2 wages.
• Total maximum: up to $69,000 if you are under 50, or $76,500 if you are 50 or older.

Sarah can contribute $23,000 as the employee and 25% of $150,000, or $37,500, as the employer. That is a total of $60,500, which is under the $69,000 maximum. At a 35% combined tax bracket, that is roughly $21,000 in tax savings.

The Solo 401(k) is also flexible. The employee contribution is not tied to a percentage of salary, Roth contributions and loans are allowed, and it is compatible with a backdoor Roth.

SEP IRA for S corp owners

The SEP IRA is the easiest plan to set up, but for most S corp owners it is not the most tax efficient. Contributions are employer only, up to 25% of W2 wages with a maximum of $69,000. There is no employee deferral, no Roth, no catch up contributions, and no loans.

For Sarah, the SEP contribution is 25% of $150,000, or $37,500. That is $23,000 less than what the Solo 401(k) allows.

People use SEPs because they are extremely simple, require almost no administration, and can be created and funded up until tax filing. But for Sarah, and for most S corp owners, the SEP IRA leaves money on the table.

Cash balance plan for high earning business owners

A cash balance plan is essentially a personal pension that you design for yourself as a business owner. Instead of you choosing how much to save, an actuary calculates how much you are allowed to contribute each year based on your age, your income, and how many years you have until retirement. The IRS allows far larger contributions into a defined benefit plan like this, which is why cash balance plans often allow six figure pre tax contributions and deductions.

Realistic annual contribution ranges by age look roughly like this:

• Age 40: about $60,000 to $90,000
• Age 45: about $80,000 to $120,000
• Age 50: about $120,000 to $180,000
• Age 55: about $150,000 to $250,000
• Age 60 and older: about $200,000 to $300,000 or more

These amounts are on top of any Solo 401(k) contributions. For Sarah at 45, a reasonable cash balance contribution is $100,000 a year. Combined with her $60,500 Solo 401(k), that is $160,500 in one year. At a 35% tax rate, that works out to roughly $56,000 in tax savings.

Owners use cash balance plans to reduce taxable income in peak earning years, catch up on retirement savings quickly, build wealth before selling a business, and smooth out large income years. There are tradeoffs to weigh. It is usually a 3 to 5 year commitment, it requires actuarial oversight, there is more administrative work, and employee rules apply.

Which S corp retirement plan is right for you?

Using Sarah’s numbers, the choice depends on what she wants:

• Flexibility: Solo 401(k), $60,500
• Pure simplicity: SEP IRA, $37,500
• Maximum tax savings in peak earning years: Solo 401(k) plus a cash balance plan, $160,500, with roughly $56,000 in tax savings

Common questions

Is a Solo 401(k) better than a SEP IRA for an S corp owner?

For most S corp owners with no employees, the Solo 401(k) is the better place to start. In the example, it allows $60,500 compared with $37,500 for the SEP IRA, and it permits Roth contributions and loans.

Can S corp distributions count toward retirement contributions?

No. Employer retirement contributions are based on W2 salary, up to 25% of W2 wages. Distributions and business profit do not count.

Can you have a cash balance plan and a Solo 401(k) at the same time?

Yes. Cash balance contributions are on top of Solo 401(k) contributions. In the example, stacking the two totals $160,500 in one year.

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If you’re an S Corp owner and you’re not using the right retirement structure, you’re almost certainly overpaying the IRS, sometimes by tens of thousands of dollars every single year.

And I’m not saying that to be dramatic. I’m a wealth manager who works with entrepreneurs and S Corp owners every single day, and I routinely see two business owners with the exact same income walk away with completely different after tax results… simply because one used the right retirement plan and the other didn’t.

So today, I want to walk you through the three most powerful retirement plans available to S Corp owners, what the IRS actually allows you to contribute, and exactly how much money you can save in taxes by using them the right way.

By the end of this video, you’ll know exactly which plan makes the most sense for your business, whether you’re early in your journey or in your highest earning years.

Here’s what we’re going to cover today:

1. Solo 401(k), the most flexible and powerful plan for most S Corp owners

2. SEP IRA, simple, but often not the best option

3. Cash Balance Plans, a personal pension for high earners who want to save six figures pre tax

To make this simple, we’re going to use one consistent example for the entire video.

Meet Sarah, our example S Corp owner

Sarah owns a marketing agency. She pays herself a $150,000 W2 salary. Her business generates $350,000 in profit before her salary. She is 45 years old. She has no W2 employees besides herself.

We’ll use this setup for every calculation so you can clearly see how each retirement plan changes her tax picture.

The one rule S Corp owners need to know

Before we get into the plans, there’s one rule that drives everything: In an S Corp, employer retirement contributions are based on your W2 salary, not your distributions, or business profit.

Employer contributions = up to 25% of W2 wages. Distributions do not count. Salary planning = retirement planning.

So for Sarah, her $150,000 salary is the foundation for calculating each plan.

Solo 401(k): the most flexible, most powerful plan

Let’s start with the Solo 401(k), because for most S Corp owners with no employees, this is the best place to start.

IRS maximums for 2025:

A Solo 401(k) has two contribution types:

Employee contribution (elective deferral). Up to $23,000 (under 50). Up to $30,500 (50+). Can be Roth or pre tax.

Employer contribution. Up to 25% of W2 wages.

Total maximum contribution. Up to $69,000 (under 50). Up to $76,500 (50+).

Using our example (Sarah):

Employee: $23,000. Employer: 25% × $150,000 = $37,500.

Total Solo 401(k) contribution = $60,500

She is under the $69,000 IRS max, so this works perfectly.

Why Solo 401(k)s are so valuable:

The employee contribution isn’t tied to salary %. Roth contributions are allowed. Employer portion reduces taxable income. Backdoor Roth compatible. Loans are permitted. Highly flexible planning for variable income.

Tax savings example:

At a 35% combined tax bracket:

$60,500 × 35% = ~$21,000 in tax savings

SEP IRA: simple, but often not the best option

Next up is the SEP IRA. This is the easiest plan to set up, but for most S Corp owners, it’s not the most tax efficient.

IRS maximums for 2025:

Employer only contributions. Up to 25% of W2 wages. Maximum of $69,000. No employee deferral. No Roth. No catch up contributions. No loans.

Using our example (Sarah):

Salary: $150,000. SEP contribution: 25% × $150,000 = $37,500.

Total SEP IRA contribution = $37,500

That’s $23,000 less than her Solo 401(k) opportunity.

Why people use SEPs:

They’re extremely simple. They require almost no administration. They can be created and funded up until tax filing.

But the drawbacks are significant:

No Roth option. No employee contribution. Lower total potential savings. Not ideal for S Corp owners optimizing taxes.

For Sarah, and for most S Corp owners, the SEP IRA leaves money on the table.

Cash balance plan: a personal pension for high earning owners

Now let’s talk about Cash Balance Plans, because this is where things get exciting for high earners.

A Cash Balance Plan is essentially a personal pension that you design for yourself as a business owner. Instead of choosing how much you want to save, an actuary calculates how much you’re allowed to contribute each year based on your age, your income, and how many years you have until retirement.

The IRS allows far larger contributions into a defined benefit plan like this, which is why Cash Balance Plans often allow six figure pre tax contributions, and six figure tax deductions.

IRS realistic contribution ranges, based on age:

Age 40: ~$60,000 to $90,000. Age 45: ~$80,000 to $120,000. Age 50: ~$120,000 to $180,000. Age 55: ~$150,000 to $250,000. Age 60+: ~$200,000 to $300,000+.

These are on top of any Solo 401(k) contributions.

Using our example (Sarah at age 45):

A reasonable annual Cash Balance contribution for her is:

$100,000 per year

This fits within actuarial limits.

Total retirement contributions for Sarah:

Solo 401(k): $60,500. Cash Balance Plan: $100,000.

Total = $160,500 in one year

Tax savings example:

At a 35% tax rate:

$160,500 × 35% = ~$56,000 in tax savings

That’s $56k she keeps, instead of sending it to the IRS.

Why business owners use Cash Balance Plans:

Reduce taxable income during peak earning years. Catch up on retirement fast. Build wealth quickly before selling a business. Smooth out large income years. Stack with Solo 401(k)s for huge combined savings.

Key considerations:

Usually a 3 to 5 year commitment. Requires actuarial oversight. More administrative work. Employee rules apply.

Using Sarah’s example:

If she wants flexibility: Solo 401(k). Amount: $60,500.

If she wants pure simplicity: SEP IRA. Amount: $37,500.

If she wants maximum tax savings during peak earning years: Solo 401(k) + Cash Balance Plan. Amount: $160,500. Tax savings: ~$56,000.

Same income. Same business. Completely different results.

If you’re an S Corp owner and you want help determining your optimal salary, running contribution projections, or designing a tax efficient retirement strategy, this is the type of planning I do every week at VDB Wealth.

If you’d like a personalized analysis for your business, feel free to reach out. Thanks for watching, and I’ll see you in the next video.