Retirement Plan Options for Law Firm Owners: SEP IRA vs. Solo 401(k) vs. Cash Balance Plan
Most law firm owners already have a retirement account. Far fewer have the right one. The difference between a SEP IRA, a Solo 401(k), and a Cash Balance Plan isn’t a matter of preference – it’s a matter of how much income you can legally shelter from tax this year, and how much flexibility you keep while doing it. For a profitable firm with one or two owners, that difference can run into tens of thousands of dollars annually, compounded over every year the wrong plan stays in place.
With Q4 underway, this is also a timing question. Some of these plans need to be in place before December 31. Others can still be opened after the calendar year ends. Getting the sequence wrong doesn’t just cost a deduction — it can close the door on it entirely for the year.
Key Takeaways
- A SEP IRA and a Solo 401(k) share the same 2026 overall cap – $72,000 – but they get there very differently, and only one of them works if your firm has employees other than yourself (and a spouse).
- The Solo 401(k) adds an employee deferral of $24,500 for 2026 (with catch-ups of $8,000 at age 50+, or $11,250 for ages 60-63), which is often the fastest way to reach the maximum on a modest salary.
- A Cash Balance Plan can allow deductions well beyond the $72,000 defined contribution limit – often $200,000 to $400,000+ a year for an owner in their late 50s or 60s – but it requires an actuary, ongoing funding commitments, and usually a 401(k) paired alongside it.
- If your firm is taxed as an S-corporation, the window to defer part of your 2026 salary into a Solo 401(k) closes December 31 – not at the tax filing deadline, because the deferral comes out of wages actually paid during the year.
- A Cash Balance Plan generally must be adopted and funded by your business’s tax filing deadline, including extensions – which, unlike the Solo 401(k) deferral above, gives S-corp and partnership owners into September of the following year to finalize funding.
- The right plan depends on your firm’s structure, your age, how many employees you have, and how much of this year’s income you’re trying to shelter – not on which plan is easiest to open.
Why the Right Plan Is Worth More Than People Assume
It’s common for a law firm owner to open a SEP IRA early in their career, contribute to it inconsistently, and never revisit the decision once the firm’s income changes. That’s usually a mistake of inertia, not analysis. A plan chosen when a firm was two years old and modestly profitable is rarely the plan that makes sense once the same owner is in their 50s, running a firm with real profit, and trying to catch up on retirement savings in the years that matter most.
The three options below aren’t ranked best to worst. Each one solves a different problem – simplicity, speed of savings, or maximum deduction — and the right answer changes as the firm and the owner’s age change with it.
SEP IRA: Simple, But Not Always Cheap
A Simplified Employee Pension (SEP) IRA is the easiest plan to set up and the easiest to misunderstand. Contributions are employer-only – there’s no employee deferral – capped at the lesser of 25% of compensation or $72,000 for 2026, calculated against compensation up to the $360,000 IRS compensation limit.
The catch that surprises owners most: a SEP IRA requires the same contribution percentage for every eligible employee, not just the owner. If your firm has staff who meet the plan’s eligibility requirements, contributing 20% of your own compensation means contributing 20% of theirs too. For a solo practitioner or a firm with no eligible staff, that’s a non-issue. For a firm with several employees, it can make the SEP the most expensive plan on this list rather than the simplest.
A SEP IRA also can’t absorb a late-career push for extra savings the way a Cash Balance Plan can, and it offers no separate employee deferral to layer on top. It’s best suited to firms that are simple, lean, and want minimal plan administration – not firms trying to maximize what a highly compensated owner can shelter.
Solo 401(k): Built for Owner-Only Firms
A Solo 401(k) (also called an Individual 401(k)) is available to a business with no full-time employees other than the owner and, if applicable, a spouse. It combines two pieces: an employee deferral of up to $24,500 for 2026 (the owner can contribute this regardless of profit, since it comes from compensation rather than firm profit), plus an employer contribution, with the combined total capped at the same $72,000 overall limit that applies to a SEP.
Catch-up contributions make this plan especially attractive for owners nearing retirement. An owner age 50 or older can add $8,000 to the deferral, for a combined cap of $80,000. Under the SECURE 2.0 enhanced catch-up for ages 60 through 63, that catch-up rises to $11,250, pushing the combined cap to $83,250 – the highest total dollar figure available outside of a Cash Balance Plan.
One timing detail trips up more owners than any other provision on this list: SECURE 2.0 allows a sole proprietor filing as a single-member LLC or Schedule C business to retroactively establish and fund a Solo 401(k) up until the tax filing deadline (including extensions) for the prior year – a genuine, useful exception. That exception does not extend the same way to owners who take salary through an S-corporation or partnership. For those owners, the employee deferral has to come out of wages actually paid during the calendar year, which means the plan needs to be established and the deferral election made before December 31 – not in the spring when the return gets filed.
Cash Balance Plan: The Serious Deduction
A Cash Balance Plan is a defined benefit plan dressed in more familiar, account-balance-style clothing. Instead of being capped by the same dollar limits as a SEP or Solo 401(k), the allowable contribution is calculated actuarially, based primarily on the owner’s age, income, and the benefit the plan promises at retirement. The result is a contribution ceiling that can run far past $72,000 – illustrative 2026 figures, before accounting for a paired 401(k), run roughly $226,000 for an owner in their early 50s, $290,000 in their late 50s, and $355,000 for an owner age 60 to 65 – figures that still require confirmation from a plan actuary for an individual’s specific facts.
The tradeoffs are real. A Cash Balance Plan requires an actuary, ongoing administration costs, and a funding commitment that’s harder to skip in a lean year than a discretionary profit-sharing contribution. It’s typically paired with a 401(k) rather than replacing one – though pairing the two reduces the separate profit-sharing portion of the 401(k) to 6% of compensation rather than the higher percentage available on its own. And if the firm has employees, the plan generally requires funding employer contributions to their accounts as well, which needs to be modeled before adoption, not discovered afterward.
This plan earns its complexity for a specific owner profile: consistently high and predictable profit, an owner later in their career trying to close a retirement savings gap quickly, and a firm structure where the cost of covering any additional employees has already been weighed. For that owner, it’s often the single most powerful tax-deferral tool available outside of selling the business itself.
This Connects Directly to How You Pay Yourself
Every one of these plans calculates its limits off compensation – W-2 wages for an S-corp shareholder-employee, not the distributions taken on top of salary. That’s the same number at the center of our recent post on reasonable compensation for law firm owners (internal link – confirm live URL before publishing): the salary set too low to minimize payroll tax is the same salary that quietly caps what can be contributed to a Solo 401(k) or SEP IRA. An owner optimizing compensation purely to reduce self-employment tax, without considering retirement plan contribution room, can end up solving one problem while creating another. These two decisions – the salary number and the retirement plan – need to be reviewed together, not separately.
2026 Deadlines Worth Calendaring Now
- Solo 401(k), S-corp or partnership owners: Plan must be established and the employee deferral election made before December 31, 2026, since the deferral comes from wages paid during the year.
- Solo 401(k), sole proprietors/single-member LLCs: Under SECURE 2.0, the plan can be retroactively established and funded up until the business’s tax filing deadline, including extensions, for the 2026 tax year.
- SEP IRA: Can generally be established and funded up until the business’s tax filing deadline, including extensions – one of the few plans that genuinely rewards procrastination, within reason.
- Cash Balance Plan: Must generally be adopted and funded by the business’s tax filing deadline, including extensions (September 15, 2027 for a calendar-year S-corp or partnership with an extension); many advisors still recommend adopting by December 31 so the plan year aligns cleanly with the owner’s W-2 wages.
Every one of these deadlines depends on accurate, current payroll and compensation records – the kind that comes out of consistent accounting and bookkeeping, not a year-end reconstruction. Our Q4 closing checklist (internal link to the Year-End Financial Planning post – confirm live URL before publishing) flagged retirement contributions as one lever worth reviewing before year-end – this is the deeper look at which plan actually fits.
Choosing the Right Plan Isn’t a Once-and-Done Decision
The plan that made sense five years ago may not be the plan that makes sense today, and the plan that’s right at 40 is rarely the plan that’s right at 58. This is exactly the kind of decision CFO advisory work is built to revisit – alongside entity structure, compensation, and the broader strategic tax planning that should be happening throughout the year, not just when a filing deadline is close.
Frequent Asked Questions (FAQs)
What's the maximum I can contribute to a SEP IRA or Solo 401(k) in 2026?
Both share the same overall cap: $72,000, or 100% of compensation if lower, whichever is less. A Solo 401(k) layers a $24,500 employee deferral inside that total, plus catch-up contributions of $8,000 (age 50+) or $11,250 (ages 60–63), which can push the combined total to $80,000 or $83,250.
Can I still open a retirement plan for 2026 after the year ends?
It depends on the plan and your entity structure. A SEP IRA, and a Solo 401(k) for a sole proprietor or single-member LLC, can generally still be established and funded up until your tax filing deadline, including extensions. A Solo 401(k) deferral for an S-corp or partnership owner must be elected before December 31, since it comes from wages paid during the year.
Is a Cash Balance Plan worth the added cost and complexity?
For an owner with consistent, high profit who is later in their career and trying to shelter significantly more than $72,000 a year, often yes – illustrative figures put the ceiling well into six figures depending on age. For a younger owner or a firm with inconsistent profit, the actuarial costs and funding commitment usually outweigh the benefit.
Does having employees change which plan makes sense?
Significantly. A SEP IRA requires contributing the same percentage of compensation to every eligible employee, and a Cash Balance Plan generally requires funding employer contributions to employees’ accounts as well. A Solo 401(k) is only available to a business with no full-time employees other than the owner and a spouse.
How does my salary affect how much I can contribute?
All three plans calculate their limits against compensation. For an S-corp owner, that means W-2 salary, not the distributions taken on top of it. A salary set artificially low to reduce payroll tax also caps retirement plan contribution room – which is why compensation and retirement planning should be reviewed as one decision, not two.
How Silver Peaks CPA Can Help
Choosing between a SEP IRA, a Solo 401(k), and a Cash Balance Plan isn’t a decision to make once and forget. Our strategic tax planning and CFO advisory work for law firms reviews retirement plan structure alongside compensation, entity structure, and cash flow – so the plan in place actually matches the firm you run today, not the one you started years ago.
Any other questions, feel free to schedule an informed opinion on where your firm stands.
