I get it. No one likes to pay taxes. That’s why qualified retirement plans are great options. But what is the best retirement plan for S Corp owners?
You can sock away money into retirement and get a tax deduction for doing so. It’s a win-win.
Most retirement strategies for the self-employed revolve around a solo 401k plan or a SEP IRA. These are great plans. But if you make over $200,000 a year these plans may not allow you to make your desired retirement contribution. More importantly, you will get stuck with a higher tax bill.
What if you want to make a retirement contribution of $50,000 to $300,000? Then you have to think a little outside the box. Traditional retirement structures just won’t work.
Let’s examine some of the best retirement plans for S-corp owners who are looking to put a nice chunk into retirement and save on taxes. But these strategies are not basic vanilla strategies. Most CPAs or financial planners won’t understand how these structures work.
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1) The Mega Backdoor Roth
You may have already heard of the Backdoor Roth. This strategy works great but really doesn’t allow you to get a large amount into retirement. But the “Mega” Backdoor Roth works a little different. It combines tax deferral with after-tax contributions. That’s why it’s so powerful.
The structure itself is pretty straightforward. It uses a solo 401(k) plan to make an “after-tax” contribution in a specified dollar amount that brings the total annual contribution for a given tax year up to the annual limit. These amounts can then qualify for tax free distributions to a Roth IRA or an “in-service” Roth rollover. There is no such thing as a Roth SEP.
The opportunity to make after-tax contributions isn’t new. But recent IRS regulations now make these contributions much more attractive. Once the participant makes the maximum annual after-tax contribution, these contributions can either be rolled out of the plan into a Roth IRA or converted to Roth assets in an in-plan Roth rollover. The participant can receive these contributions tax free. Not such a bad deal.
Let’s take a look at how this can work using the 2021 401k contribution limit of $58,000. Assume a 45 year-old business owner with an S-corp and a wage of $100,000. The business owner can make the typical tax deduction deferral of $19,500, but will be short of the annual cap. Let’s look at the contribution below for our hypothetical business owner:
- $19,500 in employee elective contributions (tax deductible)
- $25,000 in 401k profit sharing contributions (tax deductible)
- $13,500 in after-tax contributions (rolled into Roth)
- Total contribution of $57,000
2) The Cash Balance Plan
A cash balance plan is special type of retirement structure that allows business owners to make large retirement contributions. You can think of it like a 401(k) plan on steroids. In fact, annual contributions can exceed $300,000 in some situations.
A cash balance plan is called a hybrid retirement structure because it has characteristics of both defined contribution plans and defined benefit plans. The calculation is similar to a defined benefit plan, but amounts are stated in dollar amounts that are presented similar to a 401k or a SEP.

These plans are usually the best option for S-corp business owners looking to make the next step up from a solo 401k. They also can work very well for small businesses with less than 20 employees.
A hypothetical business owner with a $100,000 salary can get approximately $85,000 into the plan. But if structured correctly, that contribution could be as high as $150,000. It just comes down to tailoring the plan to meet the needs of the S-corp business owner.
3) The Prior Service Defined Benefit Plan
You have probably heard of a defined benefit plan. But you probably don’t know much about how they work. You may have a parent or family member who is receiving a payout under a plan from a large corporation. That’s because these plans were traditionally for large companies. But few know that they can work wonders for the small business owner.
Because defined benefit plans target a payout at retirement, you can usually make large tax-deductible contributions. These plans can work better than cash balance plans for younger business owners because the contributions in early years are often much larger. So in the cash balance plan example above, rather than getting $85,000 into the plan you may be able to get a bit more. But there is also one great strategy to turbo charge the plan. It’s called “prior service” or “past service.”
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Plans are structured so they provide for employee compensation in prior years. In the year the plan is established, you can then make a one-time contribution for this past service that can result in an extra 50% contribution over the base amount. Think of it as a “catch-up” contribution.
A business owner is allowed to make maximum contributions that will exceed the annual targeted contribution. This enables the owner to get a bigger tax deduction in a year with high S-corp income. Prior service adjustments are not allowed for a SEP IRA. But they can work great with the best retirement plan for s corp owners.
4) New Comparability Profit Sharing
These types of plans are great when the business owner has employees. It is a twist on the traditional 401(k) plan with a profit-sharing component. A profit sharing plan is similar to a SEP, but it is more flexible.
IRS rules require most 401(k) profit sharing plans to contribute the same percentage of pay to each participant account. This avoids discrimination and can limit owner contributions. But new comparability plans are a little different.

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New comparability plans allow each employee contribution to be analyzed separately. This allows the owner to customize the profit-sharing contribution for each employee as long as certain IRS tests are passed. This is just not possible with a SEP IRA.
But for this type of plan to work, the demographics need to be in the S-corporation owner’s favor. In most situations, the business owner is older and higher paid than most employees. In this case, the allocation can be skewed in their favor.
Defined Contribution Plan | Defined Benefit Plan |
---|---|
Optional Contributions | Mandatory Contributions |
Funding $20k to $60k | Funding $100k+ |
Tax-Deferred Investment Growth | Tax-Deferred Investment Growth |
Minimal Plan Fees | Permanent Plan Design |
The calculation does get a little complex. But let’s assume our hypothetical business owner has a couple employees age 25 who earn $30,000 a year each. The owner may be able to get a 10% profit allocation (or $10,000) and may have to make a 3.33% allocation for each employee (or $1,000 for each employee). Not such a bad deal.
5) The S-Corp Combo
I have saved the best for last. Many don’t realize that you can actually combine the above strategies into one super-sized retirement structure. This usually takes the form of a solo 401k plan that allows for Mega Backdoor Roth contributions and New Comparability Profit-Sharing. Then this is combined with a cash balance plan or defined benefit plan. You can tack on a “prior service” adjustment if you like.
This combined strategy is very powerful and can enable someone to contribute, in some situations, as high as $500,000 in one year! But be careful. There are certain restrictions and limitations when combining plans. So do your homework.
Retirement Plan Options
The S-Corp owner has the following plans available:
- 401(k) Plans
- Roth IRAs
- SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
- Defined Benefit Plans
- SEP Plans (Simplified Employee Pension)
- SIMPLE 401(k) Plans
- Cash Balance Plans
- Profit-Sharing Plans
- SARSEP Plans (Salary Reduction Simplified Employee Pension)
- Money Purchase Plans
- Multiple Employer Plans
- Employee Stock Ownership Plans (ESOPs)
- Individual Retirement Arrangements (IRAs)
Best Retirement Plan for S-Corp Owners
We have explored a few great retirement structures for S-Corps. These plans will allow substantially more contributions and flexibility compared to the SEP IRA.
As a business owner, just make sure you align your retirement strategy with your tax strategy. Hopefully, you will use one of these strategies in your financial planning.