A business owner’s retirement account is also one of the largest deductions available, and the choice of plan is covered in full in section “Tax Advantaged Accounts”. The decision in brief:
Simple to run, but employer-funded only — contributions are capped at 25% of compensation. Reaching the overall annual limit requires a large income.
Allows both an employee deferral and an employer contribution, so it reaches the same overall limit at a much lower income. It also permits Roth contributions and, unlike a SEP-IRA, leaves no pre-tax IRA balance to trigger the pro-rata rule that undermines the section “Backdoor Roth IRA”.
A defined-benefit pension structured as a hypothetical account balance, layered on top of a Solo 401(k). The contribution is computed actuarially against an age-indexed retirement target, so the limit rises sharply with age: a 50-year-old owner can typically defer $150,000–$200,000 per year on top of the Solo 401(k); a 60-year-old can reach $300,000–$400,000. The combined structure is the largest pre-tax deferral available to a self-employed taxpayer, and for a high-bracket sole owner aged 45 and above it is the single most powerful retirement vehicle in the Code. The cost is real — an actuary must sign Form 5500 each year, the plan must be funded on a binding schedule regardless of income variance, and if employees are added the plan must include them on non-discriminatory terms. Treat it as a five-to-ten-year commitment, not a one-year deferral, and pair the actuary with a TPA who has run dozens of these plans, not one who has read about them.
For most owners without employees, the Solo 401(k) is the better instrument until taxable income clears roughly $500,000; above that, layer a cash balance plan on top. See section “Solo 401(k) plans” and section “Individual Retirement Arrangements (IRAs)” for the mechanics and limits.
Captive insurance — a warning. Among the structures pitched aggressively to profitable business owners is the so-called “micro-captive” under IRC §831(b), in which the business sets up a small insurance company, pays it tax-deductible premiums, and the captive itself elects to be taxed only on investment income (premiums up to a statutory cap, currently roughly $2.85 million annually, are excluded from the captive’s taxable income). In the legitimate application — a business with a genuine and otherwise-uninsurable risk profile, arm’s-length actuarial pricing, and real claims activity — the structure is sound and useful. That application is rare. The promoted version, where a profitable business buys “coverage” it will never claim against from a captive owned by the same family trust, has been on the IRS “dirty dozen” list for over a decade, is a listed transaction with mandatory disclosure under Notice 2016-66, and has lost in the Tax Court repeatedly (Avrahami, Reserve Mechanical, Caylor Land, others). Promoters continue to sell it; the litigation continues to favor the IRS. Unless your business has the risk profile that genuinely requires captive coverage — and the underwriting work to prove it on audit — decline the pitch.