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Annual 401(k) Savings Limits

How to save $53,000 a year in a 401(k)

Most know that 401(k)s offer high contribution limits, but many think the current annual limit is $18,000 ($24,000 if over 50+ years of age). Yes, they are absolutely right for what an employee can contribute to their account. However, with an employer's company matching and/or profit sharing, the limit is much, much higher.

No matter what kind of business you are or even if you are self-employed, the all-in annual limit for each employee is $53,000 or $59,000 if you are over 50 years of age. This can result in serious tax savings and why many self-employed business owners – Individual 401k plans – find this very advantageous.

Here's how it works. If your company is structured as a corporation, the employer can contribute up to 25% of the company's W-2 payroll into the 401(k) plan. This – including your employee's contribution of up to the $18,000 – is capped in total at $53,000. If your business is an LLC, it is 20% of your net schedule C (IRS form) with the same $53K limit. While this limit is unrealistic for many companies with a large employee base, the amount an employee can benefit is well beyond what most people are aware. These high limits can be quite a benefit with real saving and tax opportunities for you and your employees.

When you compare this to a traditional IRA, you can see why business owners like 401(k) plans.

401(k) Advantages Over Traditional IRAs
  401(k) IRA
Annual limit per individual $53,000 $5,500
Age 50+ catch-up amount $6,000 $1,000
Roth income limit None $132K*
Penalty-free access, if needed Yes, via a loan No

 

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