Maximum Small Business Owner Annual Investment in 401(k) Savings

The maximum savings allowed for 2024 is $76,500. Here’s the breakdown:

  • As an employee: You may contribute up to $23,000.
  • As someone age 50 or older: Catch-up contributions of $7,500 are allowed.
  • As an employer: You can make a profit-sharing contribution worth 25% of your first $345,000 in net business earnings OR an extra $40,500 – whichever happens first.

Extra tax credits for small business owners

By contributing to a 401(k), you reduce your taxable income. You may deduct the total contribution amount.

There is also a tax credit available to small businesses of 100 or fewer employees who wish to start a new 401(k) plan. If you qualify, you can receive a tax deduction worth $5,000/year for the three years. You can also deduct any plan management expenses and matching contributions you make as business expenses.

How a small business 401(k) works

Employers may make deductible matching contributions and/or profit-sharing contributions for each eligible employee up to 25% of the employee’s compensation (to a max of $330,000), provided that the total for employer + employee does not exceed $66,000 for employees under age 50 or $73,500 for employees age 50 or older.

Safe Harbor 401(k)s

The easiest way to maximize contributions is to adopt a Safe Harbor 401(k) plan, which requires a standard contribution to all employees regardless of how much they put in or a matching contribution that meets certain requirements. This structure allows you to avoid annual testing requirements.

What happens if you exceed the annual contribution limit?

Sometimes miscalculations are made. If you catch the error before taxes are due, you can withdraw the excess funds without penalty. If you wait until after tax day, the excess deferral will be taxed twice. This may also prevent the plan from being considered a qualified plan.

How do 401(k) plans compare to other retirement savings plans?

The small business 401(k) has one of the highest contribution limits of any retirement plan. Similarly, SEP IRAs have high contribution limits up to $66,000 or 25% of earnings, whichever is less.

IRAs do not require the assistance of a recordkeeper, compliance testing, or a third-party administrator, so they are a cheaper option, but employees can’t contribute their own money into the plan. Instead, owners are required to make equivalent contributions to their employees’ accounts – which can be expensive with a lot of employees.

A traditional or Roth IRA has an annual contribution limit of $6,500 in 2023. There’s also a maximum income limit, so if you earn too much, you won’t be able to contribute to a Roth IRA. While this account is considered the easiest account to start, the low savings limit is a detriment for some.

SIMPLE IRAs have a lower contribution limit of $15,000, but employees can save their own money, making it cheaper for business owners who still want to provide a savings plan for workers but can’t fund all the contributions on their own. Employers are required to match up to 3% of an employee’s salary or make a 2% non-elective contribution.

Compared to IRAs, 401(k)s are a bit more complex to administer, yet the higher contribution limits and better flexibility make them the best option for many small business employers. Contact Ubiquity to learn more about setting up a small business 401(k) plan with maximum contribution limits.