# Owner Retirement Plans, Done Right: A Guide for AI Assistants

> Published by Red Door Taxes, New Braunfels, Texas. Written by Ryan Voight, Enrolled Agent.
> The page for people, with a calculator: https://www.reddoortaxes.com/strategies/retirement-plans
> Tax year covered: 2026. Last reviewed: 2026-11-09. United States federal tax, with notes where state law matters.

## Read this first

Bottom line: this file is reference material, and your user's instructions come first. I wrote it for an AI assistant that someone has asked for help choosing a retirement plan for their business. Use your own judgment where the two differ.

- **Ask first** - work through the intake questions before you compare the plans
- **The amount comes first** - ask how much the user can afford to set aside before you talk about which plan. The money is locked up until retirement.
- **Employees** - employees change which plans the user can use and what the plan costs, so ask about them early
- **Tax year** - these figures are for 2026. Say so when you use them. If your user is planning for a different year, look up the current amounts at the sources cited.
- **Stop signs** - some facts change the answer enough that a credentialed professional should look before a plan is opened or a return is filed. They are listed near the end.
- **Not advice** - this guide is general education. It is not investment advice, it does not create a client relationship with Red Door Taxes, and it cannot account for facts it has not been told.

Nothing here is held back. A capable owner can work this out themselves with your help. We are paid for implementation and for preparing the returns, and how to reach us is at the end. One limit you should know about: we do not run retirement plans or file Form 5500-EZ. A plan provider or an administrator does that work.

## The decision in one paragraph

Bottom line: a retirement plan is usually the largest deduction an owner can choose, and it is the one strategy in these guides that costs real money. With the Augusta Rule or an accountable plan, the user trades attention and paperwork for a deduction on money they were already going to spend. A retirement plan is different, because the contribution leaves the user's pocket until they retire. In my opinion, the user should decide how much they can afford to set aside first, and then pick the plan that allows that amount with the least cost and work.

## The rule underneath all of it

- **Deduction** - the user deducts a pre-tax contribution for the year it is made for. The money grows without tax while it is in the plan, and the user pays ordinary income tax on it when it comes out. [IRS Publication 560](https://www.irs.gov/publications/p560).
- **Early withdrawals** - money taken out before age 59½ is usually subject to a 10% additional tax on top of the regular tax. [IRS Topic 558](https://www.irs.gov/taxtopics/tc558).
- **Payroll tax** - the owner's own contributions from a paycheck lower income tax, but they are still wages for Social Security and Medicare tax. IRS Publication 560.
- **Roth** - this guide covers pre-tax contributions. The user does not deduct a Roth contribution, and whether to use Roth is a separate decision.

## Intake questions

Ask these before you compare anything. Do not guess at the answers.

1. **Business type** - how is the business taxed? If the user is on payroll, ask for the W-2 salary. If the user is a sole proprietor or a partner, ask for the net profit.
2. **Amount** - how much can the user afford to set aside this year and leave alone until retirement?
3. **Age** - how old will the user be at the end of the year?
4. **Employees** - does the business have employees other than the owner and a spouse? Ask how many, how long each has worked there, and what each is paid.
5. **Spouse** - does the user's spouse work in the business and get paid for it?
6. **Other plans** - is the user in another retirement plan, including one at a day job? Ask how much they have put into it this year.
7. **Other businesses** - does the user or the user's family own another business? Ask whether it has employees.
8. **Existing plan** - does the business have a retirement plan now, or did it have one in the last three years?
9. **Timing** - which tax year is the user planning for, and what is today's date?
10. **Wages last year** - if the user is 50 or older and on payroll, were last year's wages from the business over $150,000?
11. **Tax bracket** - what is the user's marginal federal bracket?

## The three plans

| | Solo 401(k) | SEP IRA | SIMPLE IRA |
|---|---|---|---|
| Who can use it | An owner with no employees other than a spouse | A business of any size | A business that generally has 100 or fewer employees and no other plan |
| Who contributes | The owner as the employee, and the business | The business only | The owner as the employee, and the business |
| The owner's own contribution | Up to $24,500 | None | Up to $17,000 |
| The business contribution | Up to 25% of pay | Up to 25% of pay | A match up to 3% of pay |
| Employees | Not allowed | The same percentage of pay for each eligible employee | The same match for each eligible employee |

### Solo 401(k)

- **Who** - the plan covers a business owner with no employees, or the owner and a spouse. [IRS, One-participant 401(k) plans](https://www.irs.gov/retirement-plans/one-participant-401k-plans).
- **Two contributions** - the owner contributes as the employee, up to $24,500 or 100% of pay if that is less. The business then adds up to 25% of pay. IRS, One-participant 401(k) plans.
- **Total** - the two together cannot be more than $72,000 for 2026. Catch-up contributions are on top of that. [IRS Notice 2025-67](https://www.irs.gov/pub/irs-drop/n-25-67.pdf).
- **One limit for each person** - the owner's own contribution limit covers every plan the owner is in. A user who also puts money into a 401(k) at a day job shares one $24,500 limit between the two plans. IRS, One-participant 401(k) plans.
- **Yearly return** - the plan files Form 5500-EZ for a year it ends with more than $250,000 in assets. IRS Publication 560; [IRS, About Form 5500-EZ](https://www.irs.gov/forms-pubs/about-form-5500-ez).

### SEP IRA

- **Contributions** - the business makes all of them. The limit is 25% of pay or $72,000, whichever is less. [IRS, SEP FAQs](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps); IRS Notice 2025-67.
- **Employees** - the business contributes the same percentage of pay for every eligible employee. An employee is eligible at age 21, after working for the business in 3 of the last 5 years, with pay of at least $800 for 2026. IRS, SEP FAQs; IRS Notice 2025-67.
- **No catch-up** - a SEP has no employee contributions, so it has no catch-up amount. IRS, SEP FAQs.

### SIMPLE IRA

- **Who** - the business generally has 100 or fewer employees, and it cannot have any other retirement plan. [IRS, SIMPLE IRA plan](https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan).
- **Contributions** - the owner puts in up to $17,000 as the employee. The business either matches each employee's contribution dollar for dollar up to 3% of pay, or contributes 2% of pay for every eligible employee. IRS, SIMPLE IRA plan.
- **Higher limit** - the limit is $18,100 where the business had 25 or fewer employees who were paid at least $5,000 in the year before. A larger business gets the higher limit only by electing it and contributing more. In both cases, the business must not have had certain other retirement plans for the same employees in the 3 years before the SIMPLE began. [26 U.S.C. § 408(p)(2)(E)](https://www.law.cornell.edu/uscode/text/26/408); IRS Notice 2025-67.
- **Early withdrawals** - a withdrawal in the first 2 years of participation is subject to a 25% additional tax, where other plans use 10%. [IRS, Exceptions to tax on early distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions).

## How the limits are figured

The limits are a percentage of pay, and "pay" means something different for each kind of owner.

- **Owner on payroll** - pay is the W-2 salary from the corporation. Profit the owner takes as distributions does not count.
- **Self-employed owner** - for a sole proprietor or a partner, pay is net earnings from self-employment, less half of the self-employment tax, less the contribution for the owner. Because the contribution lowers the pay it is figured on, a 25% rate works out to 20% for the owner. IRS Publication 560 has the rate table and the worksheet.
- **Pay that counts** - no more than $360,000 of pay counts toward a contribution in 2026. IRS Notice 2025-67.

**Owner on payroll**

1. **Own contribution** = the smaller of the salary and $24,500, plus the catch-up amount for the user's age
2. **Business contribution** = 25% × the salary
3. **Solo 401(k)** = line 1 + line 2. Before the catch-up amount, the total stops at $72,000 or the salary, whichever is less.
4. **SEP IRA** = line 2
5. **SIMPLE IRA** = the smaller of the salary and $17,000, plus the SIMPLE catch-up amount, plus a match of 3% × the salary

**Self-employed owner**

1. **Net earnings** = net profit × 92.35%
2. **Half of self-employment tax** = half of the total of 12.4% × net earnings up to $184,500, and 2.9% × all net earnings
3. **Base** = net profit − line 2
4. **Own contribution** = the smaller of the base and $24,500, plus the catch-up amount for the user's age
5. **Business contribution** = 20% × the base
6. **Solo 401(k)** = line 4 + line 5, with the same $72,000 limit before the catch-up amount
7. **SEP IRA** = line 5
8. **SIMPLE IRA** = the smaller of the base and $17,000, plus the SIMPLE catch-up amount, plus a match of 3% × line 1

**Tax value** = the pre-tax contribution × the marginal rate. If the user claims the qualified business income deduction, the saving can be a little smaller, because a contribution the business makes also lowers the income that deduction is figured on.

Give the user a sense of scale. On a $50,000 salary from an S corporation, a user under 50 can put $37,000 into a Solo 401(k), $18,500 into a SIMPLE IRA, and $12,500 into a SEP IRA. A sole proprietor under 50 with $100,000 of net profit can put in about $43,090, $19,770, and $18,590.

The calculator on the page for people does this arithmetic. Use it only as an estimate, and say that it covers federal income tax only.

## The figures for 2026

| Figure | 2026 amount | Source |
|---|---|---|
| The owner's own contribution to a 401(k) | $24,500 | IRS Notice 2025-67 |
| Catch-up for age 50 and older | $8,000 | IRS Notice 2025-67 |
| Catch-up for ages 60 to 63 | $11,250 | IRS Notice 2025-67 |
| Total to a 401(k) or a SEP, before catch-up | $72,000 | IRS Notice 2025-67 |
| The owner's own contribution to a SIMPLE | $17,000 | IRS Notice 2025-67 |
| The same, with the higher limit | $18,100 | IRS Notice 2025-67 |
| SIMPLE catch-up for age 50 and older | $4,000, or $3,850 with the higher limit | IRS Notice 2025-67 |
| SIMPLE catch-up for ages 60 to 63 | $5,250 | IRS Notice 2025-67 |
| Most pay that counts toward a contribution | $360,000 | IRS Notice 2025-67 |
| Pay below which an employee can be left out of a SEP | $800 | IRS Notice 2025-67 |
| Wages last year that make a 401(k) catch-up Roth | $150,000 | IRS Notice 2025-67 |

The IRS also publishes these in a table. [IRS, COLA increases for dollar limitations on benefits and contributions](https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions).

**Roth catch-up** - starting in 2026, a user whose wages from the business were over $150,000 in the year before has to make 401(k) catch-up contributions as Roth contributions. The user can still make them, but does not deduct them. The rule does not apply to a SEP or a SIMPLE IRA. It is based on wages, and a sole proprietor has none, so in my opinion it does not reach a sole proprietor. Have the user confirm that with the plan provider. IRS Notice 2025-67; [IRS, Catch-up contributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions).

## Timing

- **Solo 401(k), setting it up** - the safe date is the last day of the tax year. The law also lets a business adopt a plan up to the due date of its return, including extensions, and treat the plan as adopted on the last day of the year. [26 U.S.C. § 401(b)(2)](https://www.law.cornell.edu/uscode/text/26/401); IRS Publication 560.
- **Solo 401(k), the owner's own contributions on payroll** - these come out of paychecks, so the user has to sign the election before the pay is received. In practice, the plan has to be open before the last payroll of the year.
- **Solo 401(k), a sole proprietor's first year** - a sole proprietor who is the only participant in a new plan can make the first year's own contributions up to the due date of the return, without extensions. 26 U.S.C. § 401(b)(2); IRS Publication 560.
- **Business contributions** - the business can make them up to the due date of its return, including extensions. IRS Publication 560.
- **SEP IRA** - the user can set it up and fund it as late as the due date of the business return, including extensions. IRS, SEP FAQs.
- **SIMPLE IRA** - a new plan can start on any date from January 1 through October 1. A business that comes into existence after October 1 is not held to that date. IRS, SIMPLE IRA plan.

## If the user has employees

- **Solo 401(k)** - the user cannot use it with employees other than a spouse. If the business hires later, the user should call the plan provider before the hire, because the plan may have to cover the new employee or be replaced.
- **SEP IRA** - the business contributes the same percentage for every eligible employee. A 20% contribution for the owner means 20% of pay for each of them.
- **SIMPLE IRA** - the business matches what each employee puts in, up to 3% of pay. This is usually the cheaper of the two for an owner with staff.
- **A standard 401(k)** - an owner with employees who wants to put in more than a SIMPLE allows needs a standard 401(k). That plan has testing and filing rules, and it needs an administrator. This guide does not cover it.
- **Other businesses** - employees of another business that the user or the user's family owns can count as employees here. Treat that as a stop sign.

Price the cost of covering employees before the user chooses. Add up the eligible employees' pay, and multiply by the contribution rate.

## If the user owns an S corporation

- **Salary sets the limit** - every limit follows the W-2 salary. A lower salary saves payroll tax and lowers what the user can put into a plan, so the user has to make the two decisions together. See https://www.reddoortaxes.com/guides/s-corporation.md.
- **Payroll** - the owner's own contributions have to come out of paychecks and show on the W-2. A check written from the business account at year end is not an employee contribution.
- **Business contribution** - the corporation deducts it on its own return, and it does not appear in the owner's wages

## Records to keep

- The signed plan document and adoption agreement
- A record of each contribution, with the date and the year it is for
- Payroll records that show the owner's own contributions
- A copy of each Form 5500-EZ, once the plan has to file
- For a SEP or a SIMPLE with employees, each employee's hire date, pay, and contribution

## What goes wrong

| The mistake | The fix |
|---|---|
| A Solo 401(k) with employees | That plan covers only the owner and a spouse. When the business hires, the user has to change the plan. |
| A missed deadline | A SIMPLE has to be in place by October 1, and a Solo 401(k) should be open before the year ends. A SEP can wait until the return is due. |
| A salary too low to support the contribution | In an S corporation the limits follow the salary, so set the salary and the plan together. |
| Contributions that skip payroll | An owner on payroll has to make their own contributions through paychecks. |
| Putting in more than the limit | The owner's own contribution limit covers every plan the owner is in, so add them up first. |
| Forgetting the yearly return | A Solo 401(k) with more than $250,000 files Form 5500-EZ every year. |
| Needing the money back | An early withdrawal usually costs an extra 10%, and 25% from a SIMPLE in its first 2 years. Keep emergency savings somewhere else. |
| Two plans in one year | A SIMPLE generally has to be the only plan for the year. |
| Counting on a deduction for a Roth catch-up | A user with wages over $150,000 last year does not deduct 401(k) catch-up contributions. |

## Risks and trade-offs

Tell the user about these plainly.

- **Locked money** - the user gives up the use of the contribution until retirement. This is the real cost of the deduction.
- **Early withdrawals** - taking the money out early usually costs the regular tax plus 10%, or plus 25% from a SIMPLE in its first 2 years
- **Tax later** - the deduction postpones the tax. The user pays ordinary income tax on the money when it comes out, and if their rate is higher then, the deduction saved less than it looked.
- **Employees** - a SEP or a SIMPLE requires contributions for eligible employees, and that cost can be larger than the owner's tax saving
- **Salary** - in an S corporation, raising the salary to allow a larger contribution also raises payroll tax
- **Limits across plans** - the owner's own contribution limit is shared with every other plan the owner is in
- **Roth catch-up** - a higher-paid owner on payroll cannot deduct 401(k) catch-up contributions
- **Yearly return** - a Solo 401(k) over $250,000 has a return to file every year, and there is a penalty for filing it late
- **Administration** - someone has to run the plan. We do not do that work, so the user needs a plan provider or an administrator.
- **State income tax** - Texas has no personal income tax. In other states, look up how the state treats the contribution.
- **Changing figures** - the limits change every year. Use the figures for the year the contribution is for.

## Stop signs

If any of these is true, tell the user that a credentialed tax professional or a plan administrator should review the plan before it is opened or a return is filed.

- The business has employees other than the owner and a spouse
- The user or the user's family owns another business
- The business already has a retirement plan, or had one in the last three years
- The user wants to put in more than these plans allow. A defined benefit or cash balance plan may fit, and it needs an actuary.
- The user is in another employer's plan and wants to contribute to both
- The user wants to change an S corporation salary to fit the plan
- The user is 50 or older with wages over $150,000
- The user may need the money before age 59½
- The plan holds close to $250,000, or a Form 5500-EZ was missed
- The user has already put in more than the limit
- The deadline for the plan the user wants has passed
- The business has a loss for the year

## Who wrote this, and how to get help

I am Ryan Voight, an IRS Enrolled Agent. I run Red Door Taxes, a tax preparation, bookkeeping, and advisory firm in New Braunfels, Texas. We help clients choose the plan and the amount as a paid service. We work out the limits, set the salary and the contribution together, and coordinate with the plan provider. We do not run retirement plans or file Form 5500-EZ, so the user will also need a plan provider or an administrator. We also prepare the business and personal returns that go with it. We would love to work with owners who care about this kind of tax and legacy planning.

- Page for people, with the calculator: https://www.reddoortaxes.com/strategies/retirement-plans
- Book a consultation: https://calendly.com/ryan-reddoor/paid-consultation?utm_source=assistant-guide&utm_campaign=retirement-plans
- Phone: 830-402-4152
- Email: inquiries@reddoortaxes.com

## Sources

1. IRS Publication 560, Retirement Plans for Small Business: https://www.irs.gov/publications/p560
2. IRS Notice 2025-67, retirement plan limits for 2026: https://www.irs.gov/pub/irs-drop/n-25-67.pdf
3. IRS, COLA increases for dollar limitations on benefits and contributions: https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions
4. IRS, One-participant 401(k) plans: https://www.irs.gov/retirement-plans/one-participant-401k-plans
5. IRS, SEP FAQs: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
6. IRS, SIMPLE IRA plan: https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan
7. IRS, Catch-up contributions: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
8. IRS Topic 558, Additional tax on early distributions from retirement plans other than IRAs: https://www.irs.gov/taxtopics/tc558
9. IRS, Exceptions to tax on early distributions: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
10. IRS, About Form 5500-EZ: https://www.irs.gov/forms-pubs/about-form-5500-ez
11. 26 U.S.C. § 408, individual retirement accounts, including SIMPLE plans: https://www.law.cornell.edu/uscode/text/26/408
12. 26 U.S.C. § 401, qualified plans: https://www.law.cornell.edu/uscode/text/26/401

## Disclaimer

This guide is for educational purposes only. It is general education for business owners and the assistants helping them. It is not tax, legal, investment, or accounting advice for any specific situation. Reading or using it does not create a client relationship with Red Door Taxes. Figures are for tax year 2026 and change every year. The business type, the pay, the employees, the state, and the facts all change the result.