The 401(k) was not designed for business owners.
It was designed for employees.
A business owner who nets $400,000 per year and contributes the maximum allowed to a 401(k) is sheltering $23,500 – less than 6 percent of their income – from current taxes. The other $376,500 is fully exposed. The retirement account that employees rely on as their primary savings vehicle is, for high-earning business owners, a rounding error.
This is not a criticism of the 401(k). It is an observation about tool selection. A screwdriver is the right tool for a screw. The 401(k) is the right tool for an employee earning $80,000. For a business owner building toward a tax-free retirement on $400,000 or more of annual income, the work requires different tools.
Here are the tools.
The Ceiling: Understanding Why the 401(k) Falls Short for Business Owners
For 2026, the annual limit for employee elective deferrals into a 401(k) is $23,500. Workers age 50 and older can make an additional catch-up contribution of $7,500, bringing the ceiling to $31,000.
A business owner who also offers a profit-sharing component to their 401(k) plan can increase their total annual contribution up to the Section 415 limit – which is $70,000 in 2026 – by combining employee deferrals with employer profit-sharing contributions. For a solo business owner with no employees, this is achievable. For a business owner who also has employees and must comply with nondiscrimination testing requirements, profit-sharing contributions to owners may be limited by what can be provided to all eligible employees.
Even at the $70,000 ceiling, a business owner netting $400,000 is sheltering 17.5 percent of their income. The remaining $330,000 is taxed at ordinary income rates. And the $70,000 contributed is all tax-deferred – meaning it will eventually be taxed when withdrawn, subject to required minimum distributions beginning at age 73, and exposed to future tax rate increases.
The tools that break this ceiling do not just solve the contribution problem. They change the tax structure of the income permanently.
Tool One: The Cash Balance Plan
A Cash Balance Plan is a type of defined benefit pension plan – a retirement plan where the employer promises a specific retirement benefit rather than simply making a fixed contribution and letting investment results determine the outcome.
In a Cash Balance Plan, each participant has an account that grows each year by a defined credit rate (typically tied to Treasury yields or a fixed percentage) and employer contributions. Because it is a defined benefit structure, the actuary calculates the required annual contribution to fund the promised future benefit – and those contributions are tax-deductible business expenses.
For business owners age 50 and older, annual contributions to a Cash Balance Plan can range from $100,000 to $300,000 or more, depending on age, income, and the plan design. Combined with a 401(k) profit-sharing plan, total annual tax-deductible retirement contributions can exceed $350,000 for a business owner in their late 50s.
Here is the tradeoff: a Cash Balance Plan carries investment risk at the plan level. The employer bears the obligation to fund the promised benefit regardless of investment performance. Plans that underperform their assumed rate of return require larger catch-up contributions in subsequent years. For business owners with variable income, the mandatory contribution structure can create cash flow pressure.
Despite this, Cash Balance Plans are among the most powerful tax deferral tools available to high-income business owners who can commit to consistent plan funding.
Tool Two: The SEP-IRA
A SEP-IRA (Simplified Employee Pension Individual Retirement Account) allows a business owner to contribute up to 25 percent of net self-employment income, with a ceiling of $70,000 in 2026. For a business owner netting $280,000, this means a potential contribution of $70,000 – the maximum – in a single year.
The SEP-IRA is simpler to administer than a Cash Balance Plan. There is no actuarial requirement, no annual plan filing (unless the plan has participants other than the owner), and contributions can vary year to year. If a year is lean, the owner can contribute less or nothing without penalty.
The limitation: like the 401(k), the SEP-IRA is tax-deferred, not tax-free. Contributions reduce current taxes, but all withdrawals in retirement are taxed as ordinary income and subject to required minimum distributions at 73.
For business owners who need maximum current-year tax deductions and are willing to accept future taxable income, the SEP-IRA is a powerful and flexible vehicle.
Tool Three: The 7702 Account
Section 7702 of the Internal Revenue Code governs a class of account that grows cash value tax-free, allows tax-free withdrawals when structured correctly, and carries no IRS contribution limits (beyond internal funding parameters set to maintain the account’s tax-advantaged status). It is not subject to ERISA. It does not produce required minimum distributions. And when the owner of the business eventually sells or transitions the company, the 7702 account stays with the individual – it is not tied to the business entity.
For business owners, the 7702 account solves the problem that the 401(k) and SEP-IRA cannot: after-tax savings that grow and withdraw tax-free, with no ceiling.
A business owner who has maxed every qualified plan option still has $250,000 or more of annual income that will be taxed at ordinary rates if not redirected. The 7702 account is the structure that captures this additional income in a permanently tax-advantaged form.
The 7702 account also functions as a key person protection instrument during the accumulation years: the death benefit protects the business from the financial loss of losing the owner, and the cash value is accessible via policy loans as operating capital if needed.
Tool Four: The Section 162 Executive Bonus Plan
Section 162 of the Internal Revenue Code governs ordinary and necessary business expenses. Under Section 162, reasonable compensation paid to employees – including owner-employees – is deductible as a business expense.
A Section 162 Executive Bonus Plan uses this deduction to fund a 7702 account at the business level. Here is how it works:
The business pays a bonus to the owner-employee. The bonus is a deductible business expense. The owner-employee uses the after-tax bonus to fund a 7702 account in their own name. The business gets a tax deduction. The owner gets a growing, tax-free retirement asset.
In a double-bonus structure, the business also pays a supplemental bonus to cover the income taxes on the first bonus. The owner nets the full amount into the 7702 account with no out-of-pocket cost.
The result: the 7702 account is funded with pre-tax business dollars (from the business’s perspective) and grows tax-free (from the owner’s perspective). The Section 162 Executive Bonus Plan is one of the most efficient structures for converting business income into personal, permanent, tax-free wealth.
King Legacy Group uses the Section 162 Executive Bonus Plan as a core component of the business owner retirement strategy – combining it with qualified plans for maximum total savings and tax efficiency.
Putting It Together: A Complete Business Owner Retirement Stack
A business owner, age 54, netting $425,000 per year, has the following retirement savings options available in 2026:
| Vehicle | Annual Contribution | Tax Treatment |
|—|—|—|
| 401(k) Employee Deferral | $31,000 (with catch-up) | Pre-tax; taxable at withdrawal |
| Profit Sharing Contribution | $39,000 | Pre-tax; taxable at withdrawal |
| Cash Balance Plan | $215,000 (age 54 estimate) | Pre-tax; taxable at withdrawal |
| 7702 Account via Section 162 Executive Bonus | $120,000 | Business deduction; grows and withdraws tax-free |
| Total | $405,000 | Mixed: deferred and permanent tax-free |
Total retirement savings: $405,000, representing 95 percent of net income directed to tax-advantaged structures in this hypothetical year.
Total current-year tax deduction from qualified plans: $285,000 (the 401(k) deferral, profit sharing, and cash balance contributions).
The 7702 account adds $120,000 in tax-free growing assets annually that will produce no required minimum distributions and no ordinary income tax on withdrawal.
The Tax-Free Distribution Strategy
At retirement – which for many business owners coincides with the sale of the business – the goal shifts from tax deferral to tax-free income.
Most business owners sell and generate a large capital gain. Combined with required minimum distributions from their qualified plans beginning at 73, they can find themselves in the highest tax brackets of their lives in retirement.
The 7702 account is the counterweight. Because withdrawals from a properly structured 7702 account are tax-free and do not count as income for tax purposes, they do not affect required minimum distribution tax brackets, Social Security taxation thresholds, or IRMAA (Income-Related Monthly Adjustment Amount) surcharges on Medicare premiums.
A business owner who has accumulated $2 million in a 7702 account over 20 years of systematic contributions can draw $80,000 to $100,000 per year in tax-free income during retirement – offsetting the taxable income from required minimum distributions and reducing the overall effective tax rate across the retirement portfolio.
Frequently Asked Questions
What is a defined benefit plan, and how is it different from a defined contribution plan?
A defined benefit plan (of which the Cash Balance Plan is a type) promises a specific retirement benefit to the participant, funded by employer contributions calculated by an actuary. The employer bears the investment risk. A defined contribution plan (of which the 401(k) is the most common type) promises a specific annual contribution but does not guarantee a future benefit level. The employee bears the investment risk.
Can I have both a Cash Balance Plan and a 401(k) at the same business?
Yes. Combining a Cash Balance Plan with a 401(k) profit-sharing plan is the standard structure for maximizing tax-deductible retirement contributions. Both plans must satisfy their respective nondiscrimination testing requirements, which is more complex when the business has employees other than the owner.
What happens to my 7702 account if I sell my business?
Nothing. The 7702 account is a personal asset held in your individual name. It is not a business plan and is not tied to the entity. Selling the business has no impact on the 7702 account. The cash value and death benefit continue exactly as before. This is a significant advantage over qualified retirement plans, which may require distribution or rollover decisions upon a business sale transaction.
Is the SEP-IRA subject to required minimum distributions?
Yes. A SEP-IRA is a traditional IRA for required minimum distribution purposes. Distributions are required to begin at age 73 and are taxable as ordinary income. If minimizing required minimum distributions is a goal, the SEP-IRA contributions should be considered alongside Roth conversion planning and 7702 account funding to manage the tax exposure at 73+.
What is the ideal age to implement a Cash Balance Plan?
Cash Balance Plans are most tax-advantageous for older business owners, because the IRS allows larger contributions for people who are closer to retirement age and therefore need to fund their defined benefit more quickly. Business owners in their early 50s through early 60s typically see the highest contribution allowances. Younger business owners may find the SEP-IRA and 7702 account more efficient at their stage.
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King Legacy Group builds complete retirement stacks for business owners – combining qualified plan maximization, Section 162 executive bonus strategies, and 7702 accounts into a single coordinated plan that minimizes taxes today and produces tax-free income in retirement.
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