The annual Individual 401k contribution consists of a salary deferral contribution and a profit sharing contribution. The total allowable contribution adds these 2 parts together to get to the maximum Individual 401k contribution limit. The 2021 Individual 401k contribution limits are $58,000 and $64,500 if age 50 or older (2020 limits are $57,000 and $63,500 if age 50 or older).
Calculations for an S corporation and C corporation are based on the W-2 salary that is paid to the business owner. For example, S corporation K-1 distributions (corporate profits) are not included when making the contribution limit calculation. Also, the calculation is only based on W-2 wages for an LLC which pays W-2 wages to the business owner.
Salary Deferral Contribution
In 2021, 100% of W-2 wages up to the maximum of $19,500 or $26,000 if age 50 or older can be contributed to an Individual 401k (2020 limit is $19,500 and $26,000 if age 50 or older).
Profit Sharing Contribution
A profit sharing contribution up to 25% of W-2 earnings can be contributed into an Individual 401k.
- EXAMPLE 1
A business owner is age 35 and the owner of a subchapter S corporation with $50,000 of W-2 earnings in 2021. In this example, the business owner could contribute $19,500 of salary deferrals + $12,500 profit sharing contribution (25% X $50,000) = $32,000 Total Individual 401k contribution. - EXAMPLE 2
A business owner is age 35 and the owner of a subchapter S corporation with $100,000 of W-2 earnings in 2021. In this example, the business owner could contribute $19,500 of salary deferrals + $25,000 profit sharing contribution (25% X $100,000) = $44,500 Total Individual 401k contribution. - EXAMPLE 3
A business owner is age 50 and the owner of a subchapter S corporation with $50,000 of W-2 earnings in 2021. In this example, the business owner could contribute $26,000 of salary deferrals + $12,500 profit sharing contribution (25% X $50,000) = $38,500 Total Individual 401k contribution. - EXAMPLE 4
A business owner is age 50 and the owner of a subchapter S corporation with $100,000 of W-2 earnings in 2021. In this example, the business owner could contribute $26,000 of salary deferrals + $25,000 profit sharing contribution (25% X $100,000) = $51,000 Total Individual 401k contribution.
In the above examples, salary deferral contributions are 100% tax deductible and reduce taxable W-2 wages and profit sharing contributions are generally tax deductible as a business expense.
Is there a deadline to make salary deferrals into the Individual 401k?
Salary deferrals must be made into your Individual 401k within 15 days of the period in which you are paying yourself. For example, 401k salary deferral contributions made at the end of a calendar year on December 31 need to be deposited into the Individual 401k by January 15 at the latest.
When must profit sharing contributions be made into the Individual 401k?
The deadline to fund the profit sharing contribution is the corporate tax filing deadline March 15th. If an extension was filed then the deadline is September 15th.
Individual 401k Calculator
To determine the annual retirement contribution you could make based on your income use the Individual 401k Calculator.