Retirement Accounts for Consulting Firm Owners: More Than a SEP-IRA

A Solo 401(k) allows significantly higher total contributions than a SEP-IRA at the same salary — at an $80,000 S-corp salary, a SEP-IRA caps out around $20,000 while a Solo 401(k) can reach about $44,500. The SEP-IRA is the retirement account most consultants end up with — not because it’s the best option, but because it’s the easiest to open and any bank or brokerage will suggest it. For solo consulting firms generating over $100,000 in net income, the SEP-IRA is almost certainly the wrong vehicle.

Here is what is actually available and how each option compares.

What Are the Three Main Retirement Account Options for Consulting Firm Owners?

SEP-IRA

How it works: Employer contributions only. No employee deferral component. Contribution limit is 25% of W-2 wages (for S-corp owners) or approximately 20% of net self-employment income (for sole proprietors).

2026 limits:

• Sole proprietor: up to 20% of net SE income, max $72,000
• S-corp: up to 25% of W-2 salary, max $72,000

Example: S-corp owner with $80,000 salary → $20,000 SEP contribution (25% of $80,000).

Advantages: Simple. Can be established as late as the tax return due date (including extensions, October 15). No annual IRS filing requirement (unless assets exceed $250,000).

Disadvantages: No employee deferral component, which means lower total contributions at the same salary level. At a $80,000 salary, a SEP-IRA caps at $20,000 where a Solo 401(k) could reach $44,000+.

Solo 401(k)

How it works: You contribute in two capacities — as an employee (deferral) and as the employer (profit-sharing). The two buckets combine to produce significantly higher total contribution limits.

2026 limits:

• Employee deferral: up to $24,500 ($32,500 if age 50+)
• Employer profit-sharing: up to 25% of W-2 wages (S-corp) or approximately 20% of net SE income (sole prop)
• Combined cap: $72,000 ($80,000 if 50+)

Example: S-corp owner with $80,000 salary → $24,500 employee deferral + $20,000 employer contribution = $44,500 total (vs. $20,000 with SEP-IRA at the same salary).

Example at 50+: Same owner → $32,500 deferral + $20,000 employer = $52,500 total.

Advantages: Substantially higher contribution limits at typical consulting salary levels. Both Roth and traditional options available for the employee deferral. Loan provisions available.

Disadvantages: Must be established by December 31 of the first year you want to make contributions. Cannot have employees other than a spouse (triggers full 401(k) plan requirements if you hire). Annual IRS filing (Form 5500-EZ) required once plan assets exceed $250,000.

The Solo 401(k) is the correct vehicle for most solo consulting firm owners. If you currently have a SEP-IRA and no employees, it is worth switching to a Solo 401(k) for the higher contribution capacity.

Cash Balance Plan (Defined Benefit)

How it works: A defined benefit pension plan that allows much larger contributions than any defined contribution plan. Contributions are determined by an actuary based on age, target retirement benefit, and investment returns. Typically combined with a Solo 401(k) for maximum contribution.

2024 contribution ranges:

• Age 40: roughly $100,000–$150,000 annually
• Age 50: roughly $175,000–$250,000 annually
• Age 55+: can exceed $300,000 annually

These are in addition to (not instead of) Solo 401(k) contributions.

Example at age 52 with $400,000 in consulting income: Solo 401(k) contributes $54,500 + Cash balance plan contributes $220,000 = $274,500 total annual retirement deduction. At 37% marginal rate, that is $101,600 in federal tax deferred in a single year.

Advantages: By far the largest available retirement deduction. Excellent for consultants age 45+ with high, consistent income who need to accelerate retirement savings or maximize deductions.

Disadvantages: Annual actuarial fees ($2,000–$5,000/year). Required contributions — you must fund the plan each year (flexibility exists but is limited). More complex to administer and unwind. Requires consistent income to sustain.

The cash balance plan is worth modeling for consulting firm owners earning $250,000+ in net income, especially age 45 and above.

How Does S-Corp Salary Affect Your Contribution Capacity?

For S-corp owners, all employer retirement contributions are based on W-2 wages, not total income. This creates a direct link between your salary decision and your retirement contribution capacity.

Setting your salary only to minimize payroll taxes without considering retirement capacity is an optimization error. A $20,000 increase in salary at a 40% marginal rate costs $8,000 in taxes (payroll + income) — but unlocks $5,000 in additional employer retirement contribution that produces $1,850 in tax savings at 37%, netting out the cost differential. The interaction has to be modeled.

Full salary optimization analysis for consulting firm owners covers this tradeoff.

What Are the Contribution Deadlines for Each Account Type?

The most commonly missed deadline: Solo 401(k) employee deferral must be elected by December 31 of the tax year. If you don’t adopt the plan and make the deferral election before year-end, you lose that contribution for that tax year. You cannot retroactively elect a deferral after December 31.

Should Solo 401(k) Deferrals Be Roth or Traditional?

The Solo 401(k) employee deferral can be made on a Roth basis (after-tax now, tax-free in retirement) or traditional basis (pre-tax now, taxed in retirement).

For most consulting firm owners in the 32–37% federal bracket, the traditional (pre-tax) deferral makes sense — the deduction is worth more now at high rates than it will be at likely lower rates in retirement. The exception: if you expect to be in a similar or higher bracket in retirement, or if you have specific Roth conversion planning in mind, the Roth deferral may be appropriate.

Employer profit-sharing contributions are always pre-tax; the Roth option applies only to employee deferrals.

This article is educational and reflects general tax principles as of 2024. Consult a licensed CPA for advice specific to your situation.