RETIREMENTPLANS
The biggest deduction you choose, and the one that costs real money
Bottom line: a retirement plan is usually the largest deduction you can choose, and it is the only strategy here where you actually have to set money aside. Say you pay yourself a $50k salary from your S corporation. A Solo 401(k) lets you put in up to $37k, a SIMPLE IRA about $18.5k, and a SEP IRA $12.5k. If you set aside $20k, you save about $4,800 in tax in the 24 percent bracket.
With the Augusta Rule or an accountable plan, you get a deduction for money you were already going to spend. A retirement plan is different, because the money really does leave your pocket and you do not get it back until you retire. In our opinion, you should decide how much you can afford to set aside first, and then pick the plan that fits that number.
How much could you put in?
Enter what the business pays you and what you can afford to set aside, and the calculator will show the most each plan allows. Nothing you enter here is saved or sent anywhere. Treat the result as an educational estimate, and bring us your facts before you act on it.
Your situation
The limits in this calculator are the 2026 amounts.
What it saves
| Plan | Most you can put in | Fits your number |
|---|---|---|
| Solo 401(k) | $0 | |
| SIMPLE IRA | $0 | |
| SEP IRA | $0 |
The most each plan allows
| Plan | Yearly limit on your pay |
|---|
The rule underneath all of it
You deduct the money you put into a retirement plan this year. It grows without tax while it is in the plan, and you pay tax on it when you take it out. If you take it out before age 59½, you usually pay an extra 10 percent on top of the regular tax. So this is a deduction with a real cost, because you give up the use of that money for a long time.
The three plans below differ in how much they let you put in, how much work they are to run, and what they require you to do for your employees. This page covers pre-tax contributions. A Roth contribution gives up the deduction now in exchange for tax-free withdrawals later, and that is a separate decision.
Solo 401(k)
The most roomThis plan is for an owner with no employees other than a spouse, and you contribute to it twice. As the employee, you can put in up to $24,500 of your pay. As the employer, your business can add up to 25 percent of your pay on top of that. That is why it allows the most at lower incomes. One more thing: once the plan holds more than $250,000, it has to file a short return every year.
SEP IRA
The simplestThe business makes all of the contributions, up to 25 percent of your pay. You can set it up and fund it as late as the due date of your return, including extensions, so it is the easiest plan to add after the year is over. If you have employees, you have to contribute the same percentage of pay for them.
SIMPLE IRA
For a small staffThis plan is built for a business with employees that wants something light. You can put in up to $17,000 of your pay, and the business matches your contribution up to 3 percent of your pay. If the business has 25 or fewer employees, that limit is usually $18,100. The plan has to be in place by October 1, and it generally has to be your only plan for the year.
How your business type changes the number
If you work for your own S corporation, every limit is based on your W-2 salary. A lower salary saves payroll tax and also lowers what you can put into a plan, so you have to make the two decisions together. We cover the salary on the S corporation page.
If you are a sole proprietor or a partner, the limits are based on your net profit after half of your self-employment tax. The employer share works out to about 20 percent of that number, where a corporation uses 25 percent of your salary.
The limits for 2026
| Limit | 2026 amount |
|---|---|
| Your own contribution to a 401(k) | $24,500 |
| Extra if you are 50 or older | $8,000 |
| Extra if you are 60 to 63 | $11,250 |
| Total to a 401(k) or a SEP, before the extra amounts | $72,000 |
| Your own contribution to a SIMPLE | $17,000 |
| The same, in most businesses with 25 or fewer employees | $18,100 |
| Extra to a SIMPLE if you are 50 or older | $4,000, or $3,850 with the higher limit |
| Extra to a SIMPLE if you are 60 to 63 | $5,250 |
| Most pay that counts toward a contribution | $360,000 |
One more thing: starting in 2026, if your wages from the business were over $150,000 last year, the extra amounts for age 50 and older have to go into a 401(k) as Roth contributions. You can still make them, but you do not get a deduction for them.
If you have employees
Employees change this decision more than anything else. You cannot use a Solo 401(k) once you have employees other than your spouse. With a SEP, you have to contribute the same percentage of pay for every eligible employee, so 20 percent for yourself means 20 percent for them too. A SIMPLE costs less, because you only match what they put in, up to 3 percent of their pay.
In our opinion, you should price the cost of covering your employees before you pick a plan, and you should have a plan provider or an administrator set it up.
Setup, and what you keep
To set it up
- Pick the number. Decide how much you can afford to set aside.
- Choose the plan that allows that amount
- Open the plan with a provider before its deadline
- Sign the plan document and keep a copy
- If you are on payroll, set up your own contribution through payroll
Every year
- Make the contributions by the deadline
- Keep a record of each contribution and the year it is for
- Check the limits, because they change every year
- File the plan’s yearly return once a Solo 401(k) holds more than $250,000
- Review the plan when you hire your first employee
What goes wrong
These are the mistakes that cost owners the deduction or lead to a penalty, and how to fix each one.
| The mistake | The fix |
|---|---|
| A Solo 401(k) with employees | That plan covers only you and your spouse. When you hire, you have 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 your return is due. |
| A salary too low to support the contribution | In an S corporation the limits follow your salary, so set the salary and the plan together. |
| Contributions that skip payroll | If you are on payroll, your own contributions have to come out of your paychecks. |
| Putting in more than the limit | Your own contribution limit covers every plan you are in, including one at a day job, so add them up before you contribute. |
| Forgetting the yearly return | A Solo 401(k) with more than $250,000 files a return every year, and it is an easy one to miss. |
| Needing the money back | Money you take out before age 59½ usually costs you an extra 10 percent, and a SIMPLE costs 25 percent in its first two years. Keep your emergency savings somewhere else. |
| Two plans in one year | A SIMPLE generally has to be your only plan for the year. |
Working through this with an AI assistant?
Paste this into Claude, ChatGPT, or whichever assistant you use. It points your assistant at our full guide to this strategy, which covers the rules and their sources, this year’s figures, the setup steps, the paperwork, and the risks. It also tells the assistant when to send you to a professional. Nothing is held back.
Read https://www.reddoortaxes.com/guides/retirement-plans.md from Red Door Taxes. I own a business and I want to choose between a Solo 401(k), a SEP IRA, and a SIMPLE IRA. Using that guide, ask me its intake questions one at a time, work out the most I can contribute to each plan, and help me pick the one that fits what I can set aside. Tell me plainly when the guide says to stop and get a professional.
The guide is a plain page that anyone can read: open the guide. It states the same rules and the same figures as this page, with a source for each. All of our guides are listed in one place.
We help you pick the plan and the number
The right plan depends on what the business pays you, whether you have employees, and how much you can afford to set aside. Everything you need to work it out yourself is on this page, and nothing is held back. If you would rather hand it off, implementation is a paid service. We work out your limits, set your salary and your contribution together, and coordinate with your plan provider. We do not run the plan itself.
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.
Book a consultationFor educational purposes only. This page and its calculator are general education for business owners. They are not tax, legal, investment, or accounting advice for your specific situation, and reading them does not create a client relationship with Red Door Taxes. The calculator estimates federal income tax only. It uses the general SIMPLE limit, and it ignores state income tax, the QBI deduction, and Roth contributions you choose to make. It does not cover defined benefit plans or what a plan costs you for employees. Your pay, your age, your employees, and the current year’s limits all change the result. Nothing you enter in the calculator is saved or transmitted. Bring us your facts before you act on any of it.