Last reviewed: September 2026
Business owners underfund their own retirement savings because the business always has a nearer and louder claim on the cash: payroll, growth and taxes get paid first, and the owner gets whatever is left. Business owners tend to fund everyone else's retirement before their own. Payroll clears every two weeks, a new hire gets equipment and a signing bonus, and self-employed retirement savings get whatever cash is left in December, which in a lot of years is nothing. Fixing this is less about finding more money and more about changing the order retirement gets paid in.
Key Takeaways
- The IRS lets a self-employed owner shelter up to $72,000 in a solo 401(k) for 2026 between employee and employer contributions.
- Owners 60 to 63 can add a $11,250 super catch-up contribution on top of the regular deferral in 2026.
- A SEP-IRA caps the employer contribution at 25% of compensation with no separate employee deferral, which often leaves less usable room than a solo 401(k).
- Maryland's $40,600 pension exclusion for residents 65 and older changes the math on when a Harford County owner should convert versus contribute.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate retirement funding for the self-employed since earning his CFP® certification in 2013, by using Chesapeake's signature process, the R.U.D.D.E.R. Method™. "The Harford County owners who actually close this gap are the ones who treat their own retirement like a bill, not a bonus," Jeff says.
Why Do Business Owners Skip Self-Employed Retirement Savings?
Every dollar a business owner earns has somewhere else it could go first. Put it into inventory, a new hire, or better equipment, and there is a visible, near-term payoff: more capacity, more revenue, a business that is obviously growing. Put the same dollar into a retirement account, and nothing changes this quarter or next. The payoff shows up a decade out, competing against a business that is compounding right in front of the owner's eyes.
That comparison is not close in the moment, and it does not have to be irrational to explain the pattern. Rent gets paid because the landlord calls. Payroll gets paid because employees show up expecting a check. Self-employed retirement savings do not call anyone, so the contribution loses the argument by default, not by decision, year after year, until an owner is 55 and the retirement account looks like it belongs to someone who just started working.
Does putting more money back into the business count as retirement savings?
No. Business equity is not liquidity. A company worth $1.5 million on paper is worth nothing toward next month's mortgage payment unless someone is actively writing a check for it, and a sale rarely happens on the timeline an owner has in mind. Growth capital and retirement capital solve two different problems, and treating the first as a substitute for the second is how the gap gets this wide.
The habit that actually closes the gap looks less like willpower and more like a schedule. Three moves make retirement funding automatic instead of optimistic:
1. Set a fixed dollar figure or percentage of profit that moves into a retirement account on the same date every month, the same way a loan payment would.
2. Separate that transfer from the "is this a good month" decision entirely, so a slow month does not mean it gets skipped and a great month does not mean it gets doubled.
3. Automate the transfer out of the business account the same week payroll runs, so funding retirement never depends on a decision the owner has to remember to make.
An owner who has to actively choose to fund retirement every month will lose that choice to whatever feels more urgent almost every time. An owner whose plan sweeps a set amount out automatically does not have to make that call at all.
What Does an Underfunded Retirement Actually Cost a Business Owner?
Picture a 52-year-old owner of a services business with strong revenue and a company that might sell for somewhere in the low seven figures on paper. Personal monthly expenses run around $9,000. Liquid retirement savings sitting outside the business, in an IRA or an old 401(k), total $60,000.
That is roughly seven months of runway from retirement accounts alone if the business income stopped tomorrow, not two years, and that is before taxes on any withdrawal. Even a more conservative version of that owner, with $150,000 saved, is still well under two years of coverage if illness, a lost contract, or a partner dispute took the income away. Jeff Judge has watched owners in this exact spot discover, mid-negotiation on a sale they assumed would fund retirement, that the number landing in their bank account is a fraction of what they had in their head once taxes, transaction costs, and any earnout are subtracted.
Waiting to fund a plan "once things settle down" is not a neutral delay either. A dollar contributed at 40 has roughly 25 years to compound before a typical retirement age. The same dollar contributed at 55 has closer to ten. The IRS builds some room for this into the rules: an owner 50 or older can add an extra $8,000 in catch-up contributions to a solo 401(k) in 2026, and an owner between 60 and 63 can add $11,250 under the newer super catch-up provision. Those figures help. They do not undo fifteen years of an account sitting untouched.
Solo 401(k) vs SEP-IRA: Which Plan Actually Fits a Self-Employed Owner?
Most owners default to a SEP-IRA because it is quick to open, but the tradeoff is real. A SEP-IRA has no separate employee deferral, so an owner drawing a modest salary can end up with far less usable room than the headline limit suggests. A solo 401(k) adds an employee deferral on top of the employer contribution, which is usually the better fit for an owner who wants to maximize what actually gets sheltered each year.
| Feature | Solo 401(k) | SEP-IRA |
|---|---|---|
| 2026 combined limit | Up to $72,000 (employee + employer) | Up to $72,000, employer contribution only |
| Employee elective deferral | $24,500 in 2026, separate from the employer share | None |
| Catch-up contribution (50+) | $8,000 additional in 2026 | None |
| Super catch-up (60-63) | $11,250 in 2026 | None |
| Employer contribution rule | Up to 25% of compensation (20% for a sole proprietor) | Up to 25% of compensation |
| Roth option | Yes, in most modern plans | Available under SECURE 2.0, but limited by plan and provider |
| Setup and admin | Slightly more paperwork; a loan feature is often available | Minimal paperwork, fastest to open |
Is a SEP-IRA enough on its own for a growing practice?
For a lower-earning or newly self-employed owner it can be. Once compensation rises past roughly $150,000 to $200,000, the missing employee deferral in a SEP-IRA usually leaves real capacity on the table. Chesapeake Financial Planners typically walks a fast-growing owner through a Solo 401(k) vs SEP-IRA comparison before defaulting to whichever plan felt easiest to open at the start.
How Can a Cash Balance Plan Help Owners Catch Up Fast?
For owners further along, often in their fifties, with strong and stable cash flow, layering a cash balance plan on top of a solo 401(k) can push tax-deferred savings considerably higher than either plan alone. These plans function more like a traditional pension: the IRS sets an annual benefit ceiling each year, and the funding an owner can contribute toward that benefit scales with age and compensation, so a 58-year-old owner and a 40-year-old owner see very different numbers from the same plan design.
"The fix isn't a bigger revenue year or a better quarter," according to Jeff Judge. "It's changing the order retirement gets paid in, moving it from last on the list to third, right behind payroll and rent, so it happens automatically instead of optimistically."
This is not a strategy every business can support. A cash balance plan generally requires consistent cash flow and often coverage for employees, and it commits an owner to funding levels that are harder to skip than a solo 401(k) contribution. For the right owner, though, it can compress a decade of catch-up into a much shorter window than either plan could manage alone.
Can catch-up contributions really make up for a decade of underfunding?
Partially, and only if they start now. The $8,000 catch-up and $11,250 super catch-up available inside a solo 401(k) close part of the gap left by years of underfunding, but they cannot restore the compounding years that already passed. Pairing catch-up contributions with a cash balance plan is usually how an owner in their late fifties makes the most meaningful progress in a short runway.
How Does Maryland's Tax Treatment Change the Math for Harford County Owners?
Maryland adds a layer national retirement content usually skips. The Maryland pension exclusion lets residents 65 and older exclude up to $40,600 of eligible pension and retirement income for 2026, but that exclusion phases down dollar-for-dollar against Social Security income. That interaction matters more than most owners realize when deciding whether to prioritize a pre-tax solo 401(k) contribution now or a Roth option later.
For business owners across Forest Hill, Bel Air, and the wider Harford County and Baltimore metro area, the choice between pre-tax and Roth inside a solo 401(k) or cash balance plan is not just a federal question. Chesapeake Financial Planners works through this Maryland layer with local owners regularly, because a plan design that ignores the state's pension exclusion and estate tax exposure can leave real money on the table by the time an owner actually retires. This is exactly the kind of decision the R.U.D.D.E.R. Method™ is built for: the R.U.D.D.E.R. Method™ is Chesapeake Financial Planners' six-step planning process, Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine, which forces the state-tax layer into the conversation before a plan gets chosen, not after. For a deeper look at how Maryland taxes retirement income generally, including Social Security and IRA withdrawals, that pillar page walks through the pension exclusion in full.
If retirement funding has been an afterthought for a Harford County or Baltimore-area owner, that is exactly the kind of gap a Fit Call with Chesapeake Financial Planners is built to close. It is a short, no-obligation conversation about which plan design, and which state-tax sequencing, actually fits the business.
Frequently Asked Questions
What is the maximum I can contribute to a solo 401(k) in 2026?
Solo 401(k) contribution limits let a self-employed owner shelter up to $72,000 in 2026, combining the $24,500 employee elective deferral with an employer profit-sharing contribution of up to 25% of compensation (20% for a sole proprietor), based on IRS Notice 2025-67. Owners 50 and older can add an $8,000 catch-up, and owners 60 to 63 can add an $11,250 super catch-up on top of that.
Is a SEP-IRA or a solo 401(k) better for a self-employed business owner?
A solo 401(k) usually shelters more, because it adds an employee deferral on top of the employer contribution, while a SEP-IRA only allows the employer share. A SEP-IRA can still make sense for an owner who wants the fastest, simplest plan to open and does not need the extra deferral room a solo 401(k) provides.
How much should a business owner save for retirement each year?
There is no single percentage that fits every business, but treating a fixed dollar amount or percentage of profit as a required monthly transfer, the same way payroll and rent are treated, is the habit that closes the gap fastest. Owners with strong, stable cash flow in their fifties often need to save considerably more per year than a 40-year-old to reach a comparable retirement outcome.
What is a cash balance plan and who should consider one?
A cash balance plan is a type of defined benefit plan that credits a set benefit each year based on age and compensation, and it can be layered on top of a solo 401(k) to shelter significantly more than either plan alone. It fits best for owners in their fifties with consistent, strong cash flow who want to compress a decade of catch-up into a shorter window.
Does Maryland tax retirement account withdrawals differently than other states?
Yes. Maryland offers a pension exclusion of up to $40,600 for residents 65 and older in 2026, but the exclusion phases down dollar-for-dollar against Social Security income, which changes the relative value of pre-tax versus Roth contributions for Maryland business owners compared with residents of states without that interaction.
Ready to put a plan around self-employed retirement savings? Jeff Judge and the Chesapeake Financial Planners team serve business owners and families across Harford County and the Baltimore metro. Schedule a free Fit Call at chesapeakefp.com to talk through which plan design actually fits your business.
A version of this article was originally published on Chesapeake Financial Planners' LinkedIn.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization's initial and ongoing certification requirements to use the certification marks.
The ChFC® is the property of The American College of Financial Services, which reserves sole rights to its use, and is used by permission.
The CLU® is the property of The American College of Financial Services, which reserves sole rights to its use, and is used by permission.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
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