December 21, 2025

Building Your Financial Ark under the OBBBA: The Ultimate Guide for SMB Owners & HCEs

Crafting a Tax-Free Haven in a Chaotic World

In 2025, with the U.S. national debt over $38 trillion and the fiscal year 2025 deficit almost $1.8 trillion, the outlook for small and mid-size business owners and highly compensated employees (HCEs) is more volatile than ever. For a business owner couple aged 50 with plans to retire at 65, strategic tax and retirement planning is essential. The right approach structures portfolios and income streams to generate tax-free growth, tax-free income, and tax-controlled distributions throughout working years, retirement, and legacy.

The Financial Ark is a modern planning framework designed to convert career income into a flexible tax-free retirement plan—reducing exposure to AGI-based phase-outs, capital gains taxes, Medicare surcharges, and Required Minimum Distributions (RMDs).

Why Tax Structure and the QBI Deduction Matter for SMB Owners

• Most small businesses are not C corps: The majority of SMBs operate as S corporations, partnerships, or LLCs—where income flows through to the owner’s tax return and is taxed at individual rates.
• Qualified Business Income (QBI) Deduction: Under Section 199A (made permanent by the One Big Beautiful Bill Act—OBBBA—enacted in 2025), eligible pass-through business owners may deduct up to 20% of QBI, subject to wage, income, and business-type limits indexed for inflation. Contributions to a Roth 401(k) do not reduce QBI; contributions to cash balance plans do, allowing high earners to preserve the deduction by managing their pre-tax savings.

2025–2040 QBI Deduction Phase-Outs and Key Limits

• Single: Phases out from $197,300 to $297,300 (2025; indexed for inflation). Note: Phase-in ranges expanded starting 2026 under OBBBA.
• Married Filing Jointly: Phases out from $394,600 to $494,600 (2025; indexed for inflation). Note: Expanded phase-in ranges effective starting 2026 under OBBBA.
• Specified service businesses may lose the deduction above threshold, others may face W-2 wage/property-based restrictions.

Five Steps to Build Your Financial Ark

1. Stack Retirement Plans for Maximum Efficiency

• Solo Roth 401(k): Up to $77,500 per spouse (2025, age 50+ including catch-up; increased by inflation annually); after-tax contributions, no impact on QBI.
• Cash Balance Plan: Pre-tax contributions ($150,000–$250,000+ per spouse at age 50, rising with age/inflation), reduce QBI/taxable income and preserve/maximize the 20% deduction for higher incomes.
• Backdoor Roth IRA: $8,000 per spouse (2025, age 50+, inflation indexed), regardless of income; all growth and withdrawals can be tax-free.
• Employer Roth 401(k) after-tax or “Mega Backdoor”: Some employer plans allow for large after-tax contributions up to plan/IRS limit. Check with your HR department before acting.

2. Triple-Tax HSA Power

• Family contribution (2025): $8,550 + $1,000 catch-up per spouse at 55+ (rising with inflation annually). (Catch-up requires separate HSAs if both spouses are eligible.)
• Contributions reduce AGI and QBI. All withdrawals for healthcare are tax-free and can be invested for retirement use.

3. Tax-Efficient Equity Sales, Roth Conversions & Insurance Funding

• Ladder long-term capital gains: Sell shares so realized gains remain under $96,700 (MFJ; indexed for inflation) to pay 0% federal capital gains tax.
• Roth conversions up to the $96,700 threshold: Fill unused 0% capital gains room with Roth IRA/401(k) conversions, migrating pre-tax assets to Roth with minimal tax cost.
• Reinvest in IUL/VUL insurance: Fund Indexed or Variable Universal Life with stock sale proceeds or Roth conversions—these not only generate tax-free income and legacy, but can also embed long-term care (LTC) protection.

Tip: Combined, this diversifies risk, increases tax-free accounts, and buffers against health care expenses and RMD/AGI spikes in retirement.

4. Sequence Withdrawals for Positive Ripple Effects

• Standard deduction first: Draw up to $31,500 (MFJ, 2025; indexed for inflation) tax-free annually.
• Tax-free withdrawals next: Use Roth, HSA, IUL/VUL for income with no AGI impact; preserve Medicare brackets, Social Security limits, and phase-in eligibility for credits/deductions.
• Traditional IRA/401(k): Tap only as needed, to keep AGI low and phase-outs minimal.

5. Roth Convert to Minimize RMDs

• Roth IRAs have no RMDs for original owners; converting earlier minimizes required future taxable distributions and boosts flexibility.
• Best executed in years when cash balance/QBI stacking drives tax brackets lower.

^*Assumes annual inflation in contribution limits and a consistent 8% holding period investment return; actual results will vary widely. For illustration only. Consult professionals for personalized projections.

Key Acronym Glossary

• SMB – Small and Mid-Size Business
• HCE – Highly Compensated Employee
• QBI – Qualified Business Income (Section 199A deduction)
• RMD – Required Minimum Distribution
• SSTB – Specified Service Trade or Business
• AGI – Adjusted Gross Income
• IUL – Indexed Universal Life Insurance
• VUL – Variable Universal Life Insurance
• HSA – Health Savings Account
• IRA – Individual Retirement Account
• LTC – Long-Term Care
• OBBBA – One Big Beautiful Bill Act

Ready to Build Your Ark?

Our team collaborates directly with your tax and legal counsel to implement the most appropriate strategy for your unique needs. Get coordinated, proactive support for entity structure, advanced tax planning, and legacy design—anchored in today’s best practices and ready for whatever comes next.

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Northern Pacific Asset Management does not provide tax or legal advice. Please consult with your legal and tax advisors before making any changes to your assets or tax structures. All assumptions and projections are based on publicly available IRS and legislative guidance and are for general illustration only; they do not reflect your individual circumstances, investment growth risk, or the effects of any state or local taxes.