The Retirement Strategy Hiding in Plain Sight for W-2 Earners

Your high-income W-2 clients may be doing everything “by the book”, maxing out their 401(k)s, socking away funds in IRAs, and still hitting a wall on contribution limits. The usual strategies may not cut it when their earning potential exceeds what traditional plans can shelter. But here’s a lesser-known play: Starting a business with their spouse. It’s not about launching the next unicorn startup; it’s about structuring a legitimate side business that unlocks access to powerful retirement vehicles and strategic tax benefits. Here’s how the numbers and the IRS make this worth a closer look.

A Hidden Opportunity

Many professionals hit a hard cap on retirement savings, even though their income suggests they could and should save more. That’s where starting a side business with a spouse comes in. Think about consulting, managing rental properties, or even digital services. With the right structure, this business opens the door to:

• High-limit retirement plans like Defined Benefit Plans
• Deductions that far exceed W-2 plan limits
• Income-shifting strategies that reduce overall taxable income

This isn’t a loophole; it's smart planning backed by the tax code.

Your Client's Playbook

Here’s a framework you can use when advising clients:

Finding the Right Business

The key is legitimacy. The IRS must see that the business is real, with services rendered and income generated. That could include:

• Consulting, coaching, or professional freelancing
• Rental property operations
• Online retail or digital services
• Niche advisory or subject-matter consulting

Even part-time operations can qualify, if they’re real, documented, and active.

Choosing the Right Structure

Business structure matters, not just for liability, but for tax and retirement planning:

• Sole Proprietorship: Easy setup, limited flexibility
• LLC: Offers liability protection and pass-through taxation
• S-Corp: Enables payroll strategies and reduces self-employment tax

Each structure has unique implications for contribution caps and compliance. Structuring it right from the start is critical.

Using W-2 Income Strategically

W-2 income can fund the new business’s startup phase. This includes:

• Office equipment or co-working space
• Professional training or licensing
• Marketing and software subscriptions

This initial funding allows the business to generate active income—unlocking eligibility for additional retirement contributions.

Adding a Retirement Plan

Once income flows through the business, a retirement plan can be established. Options include:

• Solo 401(k): Up to $69,000 in combined contributions (2024), ideal for owner-operators
• SEP IRA: Contribute up to 25% of compensation, capped at $69,000
• Defined Benefit Plan: Allows $100K–$300K+ in annual contributions for profitable businesses

These vehicles offer both tax deferral and higher contribution ceilings than traditional W-2 plans.

Hiring the Spouse

Bringing the spouse into the business creates additional upside:

• Their wages are deductible business expenses
• They can contribute to the business-sponsored retirement plan
• Income can be routed into tax-advantaged savings

This also creates household-level optimization, not just individual benefits.

Tax Savings and Wealth Growth

Here’s what this strategy can do over time:

• Significantly reduce taxable income via deductions and plan contributions
• Build multiple, high-capacity retirement savings streams
• Compound assets with tax-deferred growth or Roth options

For high earners, it’s a long-term wealth multiplier that scales with business income.

Key Compliance Factors

Execution matters. To ensure IRS compliance:

• The business must be real and profit-seeking
• The entity and plan must be properly documented
• A CPA or tax advisor should oversee contributions, filings, and plan setup

Without these guardrails, the IRS could recharacterize the business or disqualify the plan.

Final Word

For clients hitting the ceiling on traditional retirement strategies, a spousal business isn’t just clever—it’s effective. When structured correctly, it opens the door to significantly higher contributions, robust tax savings, and smarter income distribution. This is a strategy that pairs financial sophistication with IRS-compliant planning. For advisors and professionals serving high-earning W-2 clients, it’s one worth putting on the table.