For successful business owners, retirement planning is a crucial component of building long-term wealth. When your business profits are substantial, layering multiple retirement plans can be one of the most powerful tax strategies available. By combining a Solo 401(k) with a SEP IRA or Defined Benefit Plan, you can dramatically increase your contributions, lower your tax liability, and accelerate your retirement savings.
Solo 401(k): The Flexible Foundation
A Solo 401(k), also called an Individual 401(k), is available to self-employed business owners with no employees other than a spouse. It offers two ways to contribute:
- Employee deferral: Up to $23,000 for 2025, or $30,500 if age 50 or older.
- Employer profit-sharing: Up to 25% of net self-employment income (20% if unincorporated).
2025 total limit: $69,000 (or $76,500 with catch-up contributions).
Contributions to an Individual 401(k) reduce overall taxable income, and growth is tax-deferred.
SEP IRA: Simple, High-Limit Contributions
A Simplified Employee Pension (SEP) IRA allows contributions up to 25% of compensation (20% for sole proprietors), capped at $69,000 for 2025. This IRA is easy to set up and maintain throughout your working years, and it works well for businesses with fluctuating income, like a seasonal design business. It is important to note that this is an employer-contribution-only retirement plan.
Because SEP IRAs and Solo 401(k)s share similar contribution caps for the employer portion, they aren’t usually layered together in the same tax year. Instead, the better pairing is often a Solo 401(k) with a Defined Benefit Plan.
Defined Benefit Plan: The Big Deduction Builder
A Defined Benefit Plan is a type of pension plan that allows very large contributions, often exceeding $100,000 per year. This can be a powerful retirement plan for high earners in California, as contributions are tax-deductible for the business, and it requires an annual minimum funding commitment.
Layering Retirement Plans for Maximum Benefit
Here’s how a high-earning California business owner could layer plans:
- Step 1: Max out Solo 401(k) contributions, both the employee and employer portions.
- Step 2: Establish a Defined Benefit Plan to contribute an additional $50,000–$250,000 annually (amount varies based on actuarial calculations).
- Step 3: Deduct all contributions from business income, lowering both federal and California taxable income.
Here’s a quick example of what this looks like:
A 52-year-old business owner earning $400,000 in net self-employment income could:
- Contribute $30,500 employee deferral to a Solo 401(k) (including catch-up).
- Add ~$69,000 employer contribution to the Solo 401(k).
- Add ~$150,000 to a Defined Benefit Plan.
Total potential contribution: ~$249,500
Why California Business Owners Benefit Even More
California’s top state income tax rate is 13.3%, making every deduction more valuable. By combining plans, you’re not only lowering your federal tax bill but also reducing your state taxable income, helping you keep more of what you earn while setting you up for long-term success.
Working With a CPA for Solo 401(k) and Beyond
Layering retirement plans requires careful coordination to avoid exceeding IRS contribution limits and to maximize federal and California tax savings. A CPA experienced in retirement plan tax strategy can run projections, work with retirement plan providers, and integrate contributions into your broader tax plan.
If you’re a profitable California business owner looking to maximize deductions and business strategies while building substantial retirement wealth, layering a Solo 401(k) with a Defined Benefit Plan could be the game-changer you need.
Hojjati CPA Can Help!
At Hojjati CPA, we help entrepreneurs design and implement retirement plans that fit their income, goals, and compliance requirements, so you can save more now and retire with confidence. Contact us today to get started!
