The maximum deductible contribution a business owner can make to an individual or small business 401(k) is $58,000 for 2021 (not counting catch-up contributions) — which includes your contributions as both an employee and employer. Here's how that breaks down:
- Contributions as an employee are limited to $19,500, or $26,000 if you're eligible for catch-up contributions (you must be age 50 or older during the calendar year, with a plan that permits catch-up contributions).
- Contributions as an employer are limited to 25% of compensation (or 20% of net earnings from self-employment for contributions to your account as an owner-employee).
What else should I know about individual 401(k)s?
An individual 401(k), also known as a solo
401(k), is designed for a self-employed business owner and his or her spouse. Through your business, you can make contributions as an employee via salary deferrals, and also contribute as an employer through contributions made by your business. For deductible contributions, the employer contributions may not exceed 25% of an employee's compensation (or 20% of your net earnings from self-employment for contributions to your account as an owner-employee). Employee and employer contributions in total can't exceed $58,000 for 2021 ($64,500 if you're age 50 or older and your plan allows catch-up contributions).
For both individual and small business 401(k)s, businesses can generally deduct employer contributions and plan expenses.
What about contributions to a small business 401(k)?
Corporations, partnerships and nonprofit organizations with employees other than the owner and spouse can also establish a
small business 401(k) plan, which is an affordable, easy-to-manage
401(k) designed for the needs of small businesses. Contribution rules for small business
401(k)s are very similar to those for individual
401(k)s. Employers may make deductible matching contributions and/or profit-sharing contributions for each eligible employee, provided the employee's total deferrals and employer contributions for the year do not exceed $58,000 for 2021 (or $64,500 if the employee has reached age 50 or older during 2021 and the plan permits catch-up contributions). Also for 2021, the maximum compensation upon which to base contributions is $290,000.
What are the potential tax implications of each?
For both individual and small business 401(k)s, businesses generally can deduct employer contributions and plan expenses. For the employee, pre-tax salary contributions and any earnings are not subject to federal income tax until they're withdrawn, and earnings attributable to Roth (post-tax) contributions may be withdrawn federal income tax-free after five years have passed since the first day of the year of the participant's first Roth contribution and the participant has reached age 59½, become disabled or died. Pre-tax assets or Roth 401(k) earnings may be subject to an additional 10% federal tax if withdrawn prior to reaching age 59½, unless an exception applies.
Consult your tax professional with specific questions.