Retirement Tax Strategies for Business Owners: The Path to a $275K Tax-Free Exit

Most business owners overpay six-figures in taxes the year they sell or retire—simply because nobody built them a tax exit plan. The myth? That all the real savings happen during your working years. The reality: the right sequence of retirement tax strategies, used before and during your exit, can turn a lifetime of sweat equity into tax-optimized income and legacy wealth you control—not the IRS.

For 2025, major law changes—collapsed deduction floors, new reporting on lump-sum sales, and the ongoing split between LLC/S Corp—and little-known IRS rules have made retirement the single most dangerous (and opportunity-rich) tax event for business owners.

This information is current as of 9/21/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.

Quick Answer: What Actually Saves Business Owners Taxes at Retirement?

A profitable retirement is not just about stashing cash in a 401(k). For modern business owners, it means using a series of entity moves (S Corp/LLC switch), retirement account contributions, timing your business sale, and leveraging IRS rules so assets pass tax-favored to you, your spouse, or even the next generation. If you act early—ideally at least three years pre-exit—most can keep $100K–$300K more than an employee with similar income, even after fees and planning costs.

One of the most overlooked retirement tax strategies for business owners is sequencing Roth conversions during the ‘gap years’—after a sale but before RMDs begin at age 73. By intentionally recognizing income in low brackets (10%–22%), you can permanently shield future growth from federal and California tax. Done correctly, a $500K Roth conversion spread over five years can save $150K+ in lifetime taxes compared to waiting until RMDs force higher-income recognition.

The Solo 401(k) Power Play: $69K+ In Pre-Tax Savings

Every self-employed or small business owner can open a Solo 401(k) (sometimes called an Individual 401(k)). For S Corp or single-member LLCs, this is the only plan that lets you make both employee and employer contributions—turbocharging your pre-tax savings.

• In 2025, you can contribute up to $69,000 pre-tax if age 50+ (see IRS 401k contribution limits).
• If your spouse is on payroll, you can legally double that family deduction to $138,000.

Example: Jessie owns a marketing S Corp, pays herself $100K salary and $120K distributions. At age 57, she maxes $30,500 employee and $25,000 employer (plus $13,500 catch-up), stashing $69,000—cutting her business and personal tax bill by $28,000. Her spouse is on $50K payroll, adding another $25,000. Result: $53,000 less in current-year taxes, and a retirement plan now eligible for tax-free Roth conversions later.

Pro Tip: Pay yourself a blend of salary and distribution to maximize your allowable employer contribution—but don’t overdo the payroll and waste FICA/Medicare dollars. It’s a Goldilocks problem only a pro can dial in.

• For in-depth structuring, see our entity structuring strategies for business owners.

SEP IRA, Defined Benefit, and the Real Pre-Retirement Windfall

Solo 401(k) isn’t the only game in town, especially for high-profit last years. Enter the SEP IRA (Simplified Employee Pension) and Defined Benefit Plan—a tool that lets high-income owners sock away up to $69,000/year for SEP, and often $100K–$300K/year for Defined Benefit (with actuarial calculations).

• Perfect for business owners who report fluctuating income, want a gigantic deduction in their final high-earning years, or have “late-career catch-up” needs.

Defined Benefit Plans remain a cornerstone of retirement tax strategies for business owners with high late-career profits. Unlike 401(k)s or SEPs, contributions are actuarially driven and can exceed $250K per year if structured properly. For owners in California’s 45% marginal bracket, a three-year run of DB contributions can lock in $300K+ tax deferral while simultaneously funding retirement income streams.

Case Study Example: Sanjay, a 63-year-old consulting LLC owner, earns a $415,000 profit in 2025. He contributes $69,000 to SEP IRA and $70,000 to a Defined Benefit Plan. Between federal and California rates, he trims $58,000 off his current year’s tax bill. SEP rules are simple; Defined Benefit plans require IRS compliance (see IRS plan qualification requirements).

Red Flag Alert: Most owners think SEP can only be set up at the end of the year—wrong. It’s flexible, but contributions must be made before you file your return (including extensions). Don’t wait until after your business sale.

For more technical details, we recommend reviewing IRS Publication 560.

Entity Exit Strategy: Why Your Structure Dictates Retirement Taxes

The exit you choose—asset sale, stock sale, or entity dissolution—determines how much of your final payout is taxed as ordinary income, capital gains, or even subject to double-taxation. Most DIY exit plans result in owners handing the IRS 35%–45% of their proceeds…when 25%–28% is often possible with proper sequencing.

• S Corp stock sales can qualify for QSBS (qualified small business stock) treatment, creating up to $10M+ capital gains exclusion (if held 5+ years, certain requirements apply—read IRS Topic 701).
• Asset sales (most common for Main Street businesses) can allow you to split goodwill vs asset values, saving capital gains for the lowest-tax buckets and ordinary income for depreciable items.

Numeric Example: Ana, an LLC retailer, sells in 2025 for $2 million (all assets). Because she fails to segment intangible/tangible assets, $320,000 is taxed at 37%—leaving $201,600 after tax. Her neighbor with an S Corp splits deal (goodwill allocation), pays 23.8% long-term capital gains, keeping $243,840—$42K more for similar net sale. (Review advanced entity structuring and tax saving breakdowns here.)

Business Sale/Exit: Installment Sales, Section 1202, and the Lump Sum Trap

Most business owners dream of one big payday. But the IRS loves lump sums: they push you into the highest brackets and can invoke Net Investment Income Tax (NIIT) and other AMT triggers. Better move? Consider an installment sale—spread over multiple years—or take advantage of Section 1202 (QSBS), which was extended in key California-friendly IRS updates for 2025.

• Installment sales split capital gains and ordinary income over the years payments are actually received (see IRS Topic 705), not all at once. This keeps your AGI lower, preserves credits, and may even minimize Medicare premiums.
• Section 1202 offers up to 100% exclusion on capital gains (up to $10 million or 10x basis) for eligible C Corp/S Corp shares held 5+ years—game changer if you meet strict requirements.

Case: Marco, a software S Corp owner, sells his company for $2.5 million. Lump sum option would trigger $672,500 tax. Instead, using an installment method, he pays $584,000 across 5 years—saving $88,500, AND keeping AGI low enough to qualify for ACA subsidy in two of those years.

Myth Bust: “Cash out now beats all risk”—for most owners, the extra tax (and lost benefits) from a single-year payday isn’t worth it. Installments, QSBS, or partial sales can reduce taxes and unlock additional strategic options.

Exit planning isn’t just about the sale—it’s about post-sale cash flow. Smart retirement tax strategies for business owners use installment sales paired with charitable remainder trusts (CRTs). By deferring recognition of gains and directing a portion into a CRT, you reduce current-year AGI, avoid NIIT, and create tax-free payouts to yourself for decades. IRS Form 5227 governs annual reporting—few use it, but it can cut effective rates on multimillion-dollar exits by 8–12%.

Multi-Generational Planning: Gifting, Legacy, and Inheritance for Business Owners

Business owners have unique leverage: you can gift ownership, set up a family trust, or use a family limited partnership to move assets outside your estate—and future tax hits! This is vital with looming estate tax rule changes in 2025-2026 (see current IRS estate tax rules).

• Gifting shares before sale minimizes gift tax and lowers your taxable estate. For 2025, the federal lifetime gift/estate tax exemption is $13.61M per person, but the step-up basis at death often shields heirs from capital gains on transferred assets.
• Setting up a Grantor Retained Annuity Trust (GRAT) or Intentionally Defective Grantor Trust (IDGT) can transfer business wealth while freezing the IRS out of future appreciation.

Scenario: Lila, owner of a design/marketing LLC, gifts 10% of business shares to her children the year before sale. At sale, they receive $200,000 tax-free (basis is stepped up to market value). Total family savings: $62,000 when compared to post-sale gifts or inheritance.

KDA Case Study: Multi-Entity Owner Retires Tax-Efficiently

Client: Bruce, 59, owns both an S Corp consulting firm with $370,000 annual profit and an equipment LLC with $950K in business assets.
Challenge: Wanted to retire, sell both businesses, and create maximum income for self and spouse with minimal legacy tax for two daughters.
What KDA Did: Analyzed both entities, implemented Solo 401(k) for both Bruce and spouse (doubling $138,000/yr in deductions for three years), converted LLC to S Corp one year pre-sale, allocated major share of sale to goodwill to lock in 20% capital gains, and used a GRAT to transfer $400K in assets to his daughters.
Results:

• First-year tax savings: $86,500
• Total five-year ROI: $271,000 (total KDA fees: $25,000)
• Two daughters received assets tax-free, avoiding future capital gains with step-up in basis

Bruce and family moved into retirement with their $3.1M investment managed for tax-favored income streams, securing children’s legacy and never triggering an audit.

Red Flag Mistakes That Trigger Massive Retirement Taxes

Underfunding or mis-timing plan moves: Waiting until the year of exit often eliminates retirement plan deductions (IRS verifies contribution dates and plan origination).

Assuming entity doesn’t matter: LLCs pay more on exit than S Corps if goodwill isn’t documented and assets aren’t segmented—you’ll pay thousands more in self-employment tax and ordinary income rates.

Lump sum sale: Tempting, but almost always rockets your AGI, triggers surtaxes and even reduces net Social Security and Medicare advantage.

Inadequate succession planning: Failing to document business transfer or gift shares pre-sale means your estate pays more in the new 0.5% charitable floor/0.5% AGI deduction changes post-2025 (see IRS Publication 526 for deduction changes).

Every mistake above has been preventable—with modest advisory fees that routinely pay 8–25x in hard-dollar tax savings.

FAQ: Business Owner Retirement Tax Strategies

Should I roll my business plan assets into a Roth IRA or keep them tax-deferred?

It depends. Roth conversions let you pay taxes now (at likely lower brackets if you retire before taking Social Security) in exchange for tax-free future growth/distributions. Powerful if you have a few low-income years post-retirement (but before RMD age), but watch for capital gains stacking.

What if I want to consult or work part-time after selling?

You can still contribute to Solo 401(k) or SEP based on self-employment consulting, albeit smaller limits. Important to keep a business presence open (minimum earnings $600+).

What IRS forms are required for these moves?

• SEP IRA: Form 5305-SEP
• 401(k): Plan establishment docs (managed by provider)
• Business sale: IRS Form 8594 (about Form 8594)
• Gift/Succession: IRS Form 709 (about Form 709)

Can I deduct health insurance in retirement?

If you maintain S Corp status and show self-employed income, you can typically deduct premiums as an adjustment to income. Once you’re fully retired or living solely off investment income, the deduction phases out unless you engage in part-time consulting.

Pro Tip: The Simplest Shortcut?

Start planning your exit three years out, calendar each entity restructuring and major plan contribution now, and work with a strategist who knows multi-year, multi-entity cases—not just typical CPA tactics. For many, $200,000+ in retirement tax savings is within reach.

Book Your Tax-Efficient Retirement Consultation

Don’t let your years of hard work get chewed up by the IRS at retirement. Book a personalized retirement tax strategy session with the KDA team. We’ll break down exactly which retirement moves, business entity switches, and estate tactics will create tens (even hundreds) of thousands in tax-efficient income for you and your family. Click here to secure your custom retirement tax plan today.