How Much Can a Business Owner Defer Into Retirement to Reduce Taxes?

Retirement Planning for Owners

Written by Conner Young

A business owner can often defer far more into retirement than an employee can. In 2026 the employee 401(k) limit is $24,500, but with profit sharing the combined limit reaches $72,000, and adding a cash balance plan can push an older, high-income owner well into six figures of pre-tax contributions in a single year. The exact number depends on your age, your income, and your plan design.

What is the basic 2026 limit, and why is it not the real ceiling for owners?

For 2026, an employee can defer $24,500 into a 401(k), or $32,500 if they are age 50 or older, using the $8,000 catch-up. Owners ages 60 to 63 can use a higher catch-up of $11,250, for $35,750 total.

That is the number most people know, and it is where most people stop. But as an owner you wear two hats: employee and employer. The employer side is where the larger deferrals live.

How does profit sharing raise the limit to $72,000?

On top of your employee deferral, your business can make an employer contribution, often through profit sharing. The combined employee and employer total for 2026 is $72,000, or $80,000 once you include the age 50-plus catch-up, and up to $83,250 for owners ages 60 to 63.

For a solo owner with no employees, a solo 401(k) is the common vehicle. It lets you capture both the employee deferral and the employer profit-sharing piece in one plan, which is how a single owner can move toward that $72,000 figure depending on income.

The employee limit is the floor for an owner, not the ceiling. The employer contribution is where the real deferral lives.

Where does the $50,000-plus deferral most owners hear about come from?

When you combine an employee deferral with a meaningful employer profit-sharing contribution, the total you defer in a year can land well above $50,000, depending on your compensation. The compensation that can be counted for these calculations is capped at $360,000 for 2026, which is why these plans scale with income up to a point.

This is the mechanism behind the idea of sending money to your own retirement instead of to the IRS. A pre-tax deferral lowers taxable income in the year you make it. It is not a permanent escape from tax, it is a deferral, and the money is taxed later when you draw it. The benefit is the timing, the growth in between, and often a lower rate later.

How can a cash balance plan push the number into six figures?

A cash balance plan is a type of defined benefit plan, and it is the tool that lets a high-income owner defer well beyond the $72,000 defined contribution world. Because contributions are calculated by an actuary based on age and income rather than a flat limit, an older owner with strong, stable profit can frequently contribute six figures in a single year, and in some cases more than $200,000.

The tradeoff is that a cash balance plan is a bigger commitment. It generally expects consistent funding year to year, it has actuarial and administrative costs, and if you have employees, it usually requires meaningful contributions on their behalf too. It fits best for owners with high, reliable income who want to defer aggressively and are comfortable with the ongoing obligation.

Which plan fits which owner?

Plan	Rough 2026 ceiling	Best fit
Solo 401(k)	Up to $72,000 ($80,000-plus with catch-up)	Owner with no employees, wants flexibility
401(k) with profit sharing	Up to $72,000 per eligible person	Business with employees, wants to reward staff
Cash balance plan	Six figures, actuarially set by age and income	Older owner, high stable profit, wants to defer aggressively

These can also be layered. A 401(k) with profit sharing stacked alongside a cash balance plan is a common design for an owner trying to defer the largest amount the rules allow. The right combination is a design decision that depends on your numbers, your age, and your staff.

This article is educational only and is not tax or investment advice. It does not create an advisory or client relationship. Contribution limits, eligibility, and plan design depend on your specific facts and on current law, and the figures here are 2026 IRS amounts that change over time. Review any retirement plan decision with your own qualified tax and financial professionals before acting.

Baskets Capital LLC is a state-registered investment adviser in the State of Texas. Registration does not imply a certain level of skill or training. Baskets Capital LLC does not provide tax preparation or legal services. Plan contribution figures reflect 2026 IRS limits and are subject to change.