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401(k) Plans for Business Owners

Qualified employer-sponsored retirement plans allowing pre-tax or Roth contributions up to $23,500 per year (2025), with additional employer profit-sharing contributions and catch-up provisions for those over 50.

Vehicle Source: generalized Verified: 2026-04-07

Definition

A 401(k) plan is a qualified employer-sponsored retirement plan allowing employees (including business owners) to defer up to $23,500 per year (2025) in pre-tax or Roth contributions, with an additional $7,500 catch-up contribution for those over 50. Employers can add profit-sharing contributions, bringing the total annual limit to $70,000 (2025).

How It Works

For business owners, the 401(k) operates as both employee and employer:

Employee deferrals: Up to $23,500 (pre-tax or Roth), reducing current taxable income
Employer profit-sharing: Up to 25% of compensation, tax-deductible to the business
Combined maximum: $70,000 per year ($77,500 with catch-up)

A Solo 401(k) (also called Individual 401(k)) is designed for self-employed individuals or business owners with no full-time employees other than a spouse. It offers the same contribution limits with simplified administration.

Solo 401(k) plans can also accept Roth contributions and allow participant loans, features not available in SEP IRAs.

When Entrepreneurs Use This

All business owners: The 401(k) is the baseline retirement deferral vehicle in the DEAPR toolkit
Solo entrepreneurs: The solo 401(k) maximizes deferral with minimal cost
Layered with Cash Balance Plans: 401(k) profit-sharing plus a Cash Balance Plan creates the maximum possible tax deferral
Roth 401(k) strategy: High-income owners who cannot contribute directly to a Roth IRA can use the Roth 401(k) for after-tax retirement savings

Dew Wealth Perspective

Many entrepreneurs dismiss 401(k) contributions as "too mainstream." The sophisticated approach recognizes that 401(k)s are one ingredient in a diversified tax recipe, offering unparalleled creditor protection while creating tax-diversified retirement buckets that can be strategically tapped as the tax situation evolves.

Frequently Asked Questions

Should I contribute pre-tax or Roth?

It depends on your current and expected future tax rates. Pre-tax contributions provide an immediate deduction; Roth contributions provide tax-free withdrawals in retirement. Many entrepreneurs benefit from both.

Can I set up a 401(k) late in the year?

The plan must be established by December 31 of the tax year. However, employer profit-sharing contributions can be made until the tax filing deadline (including extensions).

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