December 22, 2025

Most Small Business Owners Are Headed for a Retirement Crisis—Here’s How to Build a Financial Ark Before It’s Too Late

Unlock Tax-Free Millions: The 2026 & Beyond Retirement Plan Every Entrepreneur and Highly Compensated Employee Needs Now

Did you know? A retirement crisis looms for many small business owners, with too much wealth concentrated in their business and insufficient diversification.

• The 2023 Small Business Retirement Survey by the Center for Retirement Research at Boston College (in collaboration with EBRI and Greenwald Research) showed that 54% of small firms with 100 or fewer employees do not offer a retirement plan. (Source: CRR Report)
• Many owners have up to 80% of their personal net worth tied up in the business, leaving them vulnerable if the company faces challenges or fails to sell at the expected value.

Many pin their hopes on selling the business—but this is highly risky. Gallup research (2025) indicates that 74% of small business employers with employees plan to sell or transfer ownership upon retirement. (Source: Gallup)

Yet, the Exit Planning Institute reports that only 20-30% of businesses listed for sale actually sell, meaning most owners could face significant shortfalls if they haven’t diversified assets outside the business. (Source: Exit Planning Institute State of Owner Readiness)

Worse, many owners lack critical insights into their business’s true value. Recent data shows that while awareness is improving, a significant portion of owners overestimate their business’s worth without a professional valuation—often leaving them unprepared to grow value, attract buyers, or handle unexpected events.

These “triggering events”—known as the 5 D’s (Death, Disability, Divorce, Disagreement, and Distress)—force involuntary exits in roughly 50% of cases, often at fire-sale prices or resulting in closure when no plan exists.

A professional business valuation provides actionable insights to enhance attractiveness, maximize monetization potential, and prepare for any scenario—including the 5 D’s. Discover your business’s current value and opportunities for growth with our valuation process: Schedule Your Business Valuation.

Beyond sale readiness, building retirement savings independent of the business creates a liquid investment portfolio that offers:

• Emergency buffers
• Optionality for expansion, mergers, or real estate purchases
• Enhanced credit capacity through private banking and lending solutions (e.g., lines of credit, mortgages, and business loans)

We offer comprehensive private banking and lending solutions for high-net-worth clients through BNY Mellon | Pershing, as well as access to Osaic Wealth’s CapitalHub—a streamlined digital loan marketplace providing competitive options for personal and business financing, including liquidity access, real estate purchases, and growth capital. (Learn more about CapitalHub)

This diversification also allows shifting investments into industries with stronger growth trajectories and favorable outlooks—reducing single-industry risk.

These stark realities—over-reliance on an illiquid business asset, low sale success rates, and vulnerability to unexpected triggering events—highlight why building retirement wealth independent of the business is non-negotiable.

In today’s volatile global economy, marked by post-pandemic aftershocks, tariff uncertainty, persistent inflation, mounting geopolitical tensions, and a U.S. national debt exceeding $38 trillion, the risks are only amplifying. Elevated interest rates and ongoing economic unpredictability create the perfect storm for business owners and highly compensated employees.

Yet, these same challenges present a powerful opportunity: to construct a robust Financial Ark—a diversified, tax-optimized portfolio designed to preserve and grow wealth outside the business, no matter what storms lie ahead.

The Foundation: Solo Roth 401(k) or Roth 401(k)

For SMB owners (via solo 401(k)) and HCEs, the Roth 401(k) is a cornerstone of tax-free retirement planning. Unlike traditional 401(k)s, Roth contributions are taxed upfront, allowing growth and qualified withdrawals tax-free—a hedge against potential future tax increases.

Key Numbers (2026 IRS Limits)

• 2026 Employee Deferral Limit: $24,500 (plus $8,000 catch-up for age 50+; higher catch-up possible for ages 60-63 if plan allows).
• 2026 Total Contribution Limit (Employee + Employer): Up to $72,000 (plus catch-up).

By paying taxes today, you secure tax-free income in retirement.

Pros and Cons of Solo Roth 401(k)/Roth 401(k)

Pros:

• High contribution limits: Up to $72,000 total in 2026 (employee deferral $24,500 + employer contributions, plus catch-up), enabling significant tax-free accumulation.
• Tax-free growth and withdrawals in retirement, ideal if expecting higher future tax rates.
• Flexible for business owners: Solo versions allow max contributions from both “employee” and “employer” sides.
• No income limits for Roth contributions (unlike Roth IRAs).

Cons:

• Contributions are after-tax, reducing current take-home pay compared to traditional pre-tax options.
• No immediate tax deduction, less beneficial if current tax bracket is higher than expected in retirement.
• Required minimum distributions (RMDs) apply unless rolled to a Roth IRA.
• Investment risk: Market performance affects growth; no guarantees.
• Note: For higher earners (prior-year wages >$150,000), catch-up contributions must be Roth starting 2026.

The Reinforcement: Backdoor Roth IRA

For higher-income households, the Backdoor Roth IRA allows indirect Roth contributions by bypassing direct income limits.

Key Numbers (2026 IRS Limits)

• 2026 Annual Contribution: $7,500 per individual ($8,600 over age 50).

This provides tax-free income for those otherwise ineligible for direct Roths.

Pros and Cons of Backdoor Roth IRA

Pros:

• Bypasses income limits for direct Roth IRA contributions, allowing tax-free growth for those otherwise ineligible.
• Relatively modest annual contributions add diversified tax-free income.
• No RMDs during owner’s lifetime.
• Simple for those without existing pre-tax IRAs.

Cons:

• Pro-rata rule complicates conversions if you have pre-tax IRA balances, potentially triggering taxes on conversions.
• No upfront tax deduction (nondeductible contributions).
• Administrative steps required annually; potential for IRS scrutiny or future legislative changes.
• Lower contribution limits compared to 401(k)s.

The Accelerator: Health Savings Account (HSA)

The HSA’s triple tax advantage: deductible contributions, tax-free growth, and tax-free medical withdrawals. After 59½, non-medical withdrawals are taxed like traditional IRA.

Key Numbers (2026 IRS Limits)

• 2026 Max Contribution (Family): $8,750 (plus $1,000 catch-up if 55+).
• 2026 Max Contribution (Individual): $4,400 (plus $1,000 catch-up if 55+).

Maxing HSAs covers healthcare while enhancing retirement.

Pros and Cons of Health Savings Account (HSA)

Pros:

• Triple tax benefits: Deductible contributions, tax-free growth, tax-free withdrawals for medical expenses.
• After age 65, non-medical withdrawals are penalty-free (taxed as income), functioning like a traditional IRA.
• Portable and rolls over unused funds indefinitely; excellent for covering rising retiree healthcare costs.
• Family limits provide solid contributions.

Cons:

• Requires enrollment in a high-deductible health plan, which may mean higher out-of-pocket costs upfront.
• Contributions cease upon Medicare enrollment (typically age 65).
• Limited to those with qualifying HDHP; not available to everyone.
• Non-medical withdrawals before 65 incur penalties.

The Golden Parachute: Cash Value Life Insurance

For SMB owners and HCEs, policies like Indexed Universal Life (IUL) or Variable Universal Life (VUL) offer growth potential with tax-free loans/withdrawals and no contribution limits. Many such policies can include a Long-Term Care (LTC) rider, allowing acceleration of the death benefit for qualified long-term care expenses—often on a true cash indemnity basis (fixed monthly payment regardless of actual expenses), unlike many standalone LTC policies which are reimbursement-based.

Commonly used in executive compensation arrangements like Section 162 executive bonus plans, restricted executive bonus arrangements (REBA), split-dollar plans, or funding non-qualified deferred compensation (NQDC) or supplemental executive retirement plans (SERPs).

Key Benefits

1. Asset Protection: Cash values often creditor-protected; ILITs for added security.
2. Diversification: Enhances portfolio resilience.
3. Succession Planning: Aids business transitions and wealth transfer.
4. Long-Term Care Protection: Optional LTC riders provide access to funds for care needs without “use it or lose it” risk.

Pros and Cons of Cash Value Life Insurance (e.g., IUL or VUL, often with LTC Rider)

Pros:

• No contribution limits, allowing substantial funding beyond qualified plans like 401(k)s or IRAs.
• Tax-deferred cash value growth and potential for tax-free access via policy loans/withdrawals (if structured properly and not as a Modified Endowment Contract).
• Income tax-free death benefit to beneficiaries.
• Often used in executive compensation: Employer bonuses premiums (tax-deductible as reasonable compensation under IRC Section 162), providing executives with personally owned life insurance at low or no out-of-pocket cost (especially in “double bonus” setups covering taxes).
• Retention tool: Restricted arrangements (e.g., REBA with vesting schedules) incentivize executives to stay, restricting cash value access until vested.
• Asset protection in many states (cash value often creditor-protected) and aids succession/estate planning.
• Flexibility: IUL offers indexed growth with downside protection; VUL provides direct market upside potential.
• Attracts/retains key talent by offering supplemental benefits beyond standard qualified plans.
• With LTC rider: Provides long-term care coverage without “use it or lose it” (death benefit paid if unused); many offer true cash indemnity benefits (fixed monthly payout for qualified care, no receipts needed); often more cost-effective than standalone LTC; tax-qualified benefits typically tax-free.

Cons:

• High fees, commissions, and charges often reduce net returns compared to direct investments.
• Complexity and risk: IUL has caps/floors limiting upside; VUL exposes cash value to full market losses.
• In executive bonus plans: Bonus is immediately taxable income to the executive (though double bonus mitigates this).
• Not primarily an investment—better as a supplement after maxing other tax-advantaged accounts.
• Risk of policy lapse if underfunded or loans exceed basis, triggering taxes.
• Potential estate inclusion if executive owns policy; IRS scrutiny on “reasonable compensation” for deductibility.
• In split-dollar or NQDC funding: Additional rules/tax implications (e.g., imputed interest on loans, compliance with Section 409A).
• Lower liquidity early due to surrender charges.
• With LTC rider: Using benefits reduces/erodes death benefit; potential caps on monthly LTC payout; stricter underwriting; higher premiums than base policy; not all policies offer indemnity (some reimbursement only).

The Ripple Effects of Tax-Free Income

Tax-free streams from Roths and life insurance amplify planning:

• Lower Roth Conversion Taxes: Reduces taxable income for conversions.
• Capital Gains Efficiency: May qualify for lower rates. For recent years, married couples with taxable income under ~$96,700 pay 0% on long-term gains (thresholds adjust annually).
• Maximized Social Security: Less taxable income means less SS taxation.

The Big Picture

By integrating these strategies—excluding cash value life insurance—a couple (both age 50) maxing out contributions from now through age 65 could accumulate approximately $6+ million in tax-free retirement assets over 15 years (at an assumed 8% annual return). Traditional accounts may face significant tax liabilities in retirement. Projections are illustrative—actual results vary based on market performance, fees, and individual circumstances.

Key Assumptions and Considerations

1. Scenario: Married couple contributing maximums annually. Assumes eligibility for solo 401(k) max and family HSA.
2. Contributions: Max total limits where applicable.
3. Tax Code Stability: Assumes current rules continue; future changes possible.
4. Advisory Oversight: Projections assume 8% gross return (historical equity average); actual net returns lower after fees/inflation. Seek professional guidance.
5. No Guarantees: Investments involve risk; past performance not indicative of future results.

Conclusion: Sail Through the Storm

Financial arks require planning and execution. Proactive SMB owners and HCEs can achieve confidence and freedom.

Isn’t it time you started building your Financial Ark?

Ready to Build Your Financial Ark?

Schedule a no-obligation discovery call with our team. We collaborate directly with your existing tax and legal advisors to design and implement advanced strategies tailored to your business, wealth, and legacy goals.

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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.