Ask a successful founder how the retirement side of their taxes is going and most say the same thing. They max the 401(k). Every year, the full amount, sometimes a company match on top. It feels responsible. It feels finished. The box is checked, the accountant nodded, and the subject closes for another twelve months.
Here is what that box is actually worth. In 2026 an employee can defer $24,500 into a 401(k). Add the catch-up for age fifty and over and it is $32,500. Fold in profit sharing and the total that can land in a defined contribution plan for one person is capped at $72,000 for the year. Now hold that against a founder who nets $700,000 from the business. The most celebrated move in American personal finance is sheltering roughly ten percent of that income. The other ninety percent is taxed at the top of the schedule, and the 401(k) did nothing about it.
So the 401(k) is not wrong. It is small. Maxing it is a good habit the way flossing is a good habit. It is not a strategy, and treating it as one is how high earners talk themselves into believing the tax question is handled while the largest deduction available to them sits untouched. For a profitable owner over forty five, that unused deduction is not a few thousand dollars. It is six figures a year, every year, for as long as the profit holds.
The number that should bother you
A 401(k) is a defined contribution plan. You put money in, the ceiling is fixed regardless of how much you earn, and whatever it grows to is what you get. The tax code contains another kind of plan that works in the exact opposite direction. A defined benefit plan starts from the pension you are allowed to receive in retirement and works backward to calculate how much you must fund now to pay for it. For 2026 that benefit limit is $290,000 a year for life. Funding a pension that large is not a $72,000 exercise. It is a several hundred thousand dollar one, and the contribution is deductible to the business the year it goes in.
The modern version is the cash balance plan. It is a defined benefit plan written in a form a founder can actually read. Each participant has a hypothetical account that grows by a set credit every year. Because the required contribution is driven by your age and the number of years left to fund the benefit, the older and higher earning you are, the more the code lets you set aside. In 2026 the cash balance contribution alone runs to roughly $197,500 at age fifty and about $325,100 at age sixty. Stack the 401(k) and profit sharing on top and the combined deductible contribution reaches around $266,500 at fifty and $408,350 at sixty. Across the life of a plan a single participant can fund close to $3.7 million. Every dollar comes off the business's taxable income.
Look at the gap without flinching. The tool most owners call their tax plan moves $72,000. The tool almost none of them have heard of moves five times that at the same age, and more as they get older. Same founder, same year, same tax code.
The 401(k) shelters a slice. The pension shelters the meal. The only difference between the two founders is which plan someone told them to open.
It is worth noticing that 2026 quietly made the small tool smaller for exactly the people reading this. Under the SECURE 2.0 rules taking effect this year, anyone who earned more than $150,000 in wages last year must now make their 401(k) catch-up contribution as after-tax Roth money rather than pre-tax. The one part of the 401(k) built for people approaching retirement just lost its deduction for the high earners who were using it. The account you were counting on is not getting more generous. For the top of the income range, it is getting less so.
Why nobody put this in front of you
The reason most owners never hear about a cash balance plan is not a conspiracy. It is the division of labor. Your CPA files the return. A payroll provider administers the 401(k). Neither one is in the business of designing a custom pension, because that takes an actuary, an annual valuation, and a multi-year funding commitment. It is a real obligation, not a checkbox on a portal. Nobody in the standard lineup is paid to raise it, so it never gets raised.
This is the recurring pattern in a founder's tax life, and it is worth stating plainly. The CPA is not failing at strategy. The CPA is doing the job the CPA was hired to do, which is report what already happened accurately and on time. That is the right job. It is simply a different job than deciding, in advance, how much of your income the code will ever get to touch. Right professional, wrong vacancy. Compliance answers what happened. Architecture decides what is allowed to happen. The pension lives entirely on the architecture side of that line, which is why it stays invisible to a process built around the return.
None of this means everyone should open one. A defined benefit plan is a commitment. You are expected to fund it consistently for several years, and the IRS treats it as a genuine pension, not a piggy bank you raid in a soft quarter. It fits a specific owner. Consistent high profit, a business that can fairly cover the employees the plan must include, and a real appetite to defer income you do not need to spend. It is the wrong tool for thin margins or a large young staff, because the plan cannot only benefit you. The point is not that every founder needs a pension. The point is that the founders who clearly should have one almost never get asked the question.
A test you can run today
Pull last year's return and answer three questions honestly.
First: what percentage of my total income did every retirement contribution I made actually shelter? Add the 401(k), the match, and any profit sharing, then divide by your real income. If that number is under fifteen percent and you sit in the top bracket, you are paying full freight on the rest by default, not by decision.
Second: is my income high, consistent, and likely to stay that way for the next five years? A defined benefit plan rewards precisely this profile, and punishes an unstable one. If the answer is yes and no one has ever modeled a pension for you, that is a gap, not a coincidence.
Third: who on my team is responsible for the size of my deduction, not just the accuracy of my return? If the honest answer is no one, then the person optimizing how much you keep is you, in the margins, once a year, using the smallest instrument on the shelf.
The deduction is not the whole move
Here is where a large contribution stops being a tax trick and turns structural. A $300,000 deduction does not only cut this year's bill. It pulls your taxable income down, and taxable income is the hinge several other things swing on. It can bring you back under the thresholds where the qualified business income deduction begins to phase out for certain businesses. It changes the math on what your entity should be doing. It shifts how much capital the business retains versus distributes, which is a financing question as much as a tax one. And the money inside the plan compounds sheltered, which is capital you are no longer lending to the government at zero interest every April.
Run in isolation, a cash balance plan is a big deduction. Run as part of the whole, it is a single decision that moves tax, capital, and the eventual value of the business at the same time. That is the real difference between a founder who collects tax moves and one whose tax, capital, partnerships, and systems are built to pull in the same direction. The 401(k) got treated as a standalone errand, which is exactly why it stayed small. The pension only works when it is coordinated with everything else, which is precisely why it rewards owners who run the business as one system instead of four disconnected ones.
None of this is an argument against the 401(k). Keep maxing it. It is just not the answer to a question it was never built to hold. The founder netting seven figures who shelters ten percent and calls it planning has not made a decision. He has accepted a default and dressed it up as diligence. The owners who keep materially more of what they earn did something duller and far more valuable. They asked what the code actually allows a business like theirs to deduct, and then they built for it.
If you are interested in exploring an engagement, the starting point is a 30-minute private call. There is no pitch and no pressure, it is a conversation to find out whether the work makes sense. You can book directly at calendly.com/chelsea-eba/30min.
About the author
Chelsea Michelle is the founder of Elevated Business Advisors, a private advisory practice for founders, investors, and family offices. She architects tax, capital, partnerships, and AI and systems as one integrated system for a deliberately small roster of clients, by application, across Florida and nationally. She also hosts The Power of the Pivot podcast.