For most small business owners, the right retirement plan is some version of a 401(k) — almost always paired with an S-Corp structure. But the plan choice is not the first decision you make. It is the last. Before you can know which plan to open, you need to resolve entity structure, payroll, and whether you actually want to lock money in a qualified plan. The answer to those three questions points to one plan the vast majority of the time.

"The biggest mistake I see people make is not having a tax strategy before setting up a retirement plan. In the tax planning stack, retirement contributions come last. It is just the cherry on top for tax planning."

— Neal McSpadden, Founder, Tax Sherpa

Key Takeaways

• Retirement plan selection is the final step in tax planning — not the entry point. Entity structure, deduction strategies, and reasonable compensation analysis all come first.
• For Tax Sherpa clients at every revenue tier — under $250k, $250k–$750k, and $750k+ — the default answer is some form of 401(k). The only variable is whether it is solo, safe harbor, or traditional.
• The S-Corp + Solo 401(k) stack outperforms a SEP IRA for most owners because the flat-dollar employee deferral ($24,500 in 2026) adds contribution room that a percentage-of-W-2 formula like SEP cannot match.
• Three questions resolve most plan selection decisions: What entity are you now? What are your hiring plans for the next 1–3 years? Are you genuinely committed to locking money away long term, or is this primarily a tax move?
• Client attitude toward retirement matters as much as the math. A skeptic who is not committed to leaving the money alone will not benefit from the complexity of a qualified plan.
• The two universal rules Neal has observed across thousands of careers: put in substantially more than you think you need, and leave it alone. Virtually every retirement failure traces back to one of those two rules being broken.
• The S-Corp + 401(k) default has one meaningful override: states that penalize S-Corp election (Tennessee, DC) may make a Schedule C + SEP IRA more efficient, because the S-Corp structure required to generate a W-2 for Solo 401(k) contributions costs more than it saves.

Retirement Is the Last Step — Here Is Why That Changes Everything

Most retirement planning advice puts the plan front and center. Pick a SEP IRA or a Solo 401(k), fund it, done. That approach is not wrong if you have no other optimization to run. But for small business owners with legitimate complexity — entity elections, payroll, home office, business deductions, family payroll strategies — the retirement contribution should be sized only after everything else has been resolved.

The reason is mechanical. The size of a Solo 401(k) or SEP IRA employer contribution is a function of W-2 wages (for an S-Corp) or net self-employment income (for a Schedule C). Both of those numbers change dramatically as you optimize the rest of the stack. If you set your W-2 salary before running a reasonable compensation analysis, or you start a retirement plan before you know whether you are converting to an S-Corp, you may be building on a number that is about to move.

Neal's full tax planning sequence — for a typical S-Corp client — runs in this order:

1. Entity structure (S-Corp election, if not already in place)