After my first few years of employment, I got close to the yearly 401(k) contribution limit. I wasn’t certain if what my employer contributed counted toward the yearly max contribution. So I did some digging.
Contributions from your employer do not count toward the yearly max 401(k) contribution limit.
According to the IRS, the total limit you can contribute to a plan is:
Overall limit on contributions
Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:
employer matching contributions
employer nonelective contributions
allocations of forfeitures
The annual additions paid to a participant’s account cannot exceed the lesser of:
100% of the participant’s compensation, or
$54,000 ($60,000 including catch-up contributions) for 2017; $53,000 ($59,000 including catch-up contributions) for 2016.
Therefore, you as an individual can only contribute the $18,000 maximum, and the maximum your employer can contribute for a matching contribution is also $18,000. This totals $36,000. So how can you stock away the $54,000 that is noted above?
The Solo 401(K)
Let’s jump into an example to show how you could stock away $54k into your 401(k). Please note, I fully understand saving $54k is not achievable for most people, myself included. But I love finding ways to save cash – especially ways that have nice tax advantages. One final note before jumping into the example – the key to making this work is the side hustle!
A guy named Brad is a consultant for a large utility contracting company. He lives and breathes SCADA (complicated software that literally keeps the lights on.) He is a diligent saver and maxes out his 401(k). Brad’s company also has a healthy match that adds an additional $10k . Therefore, Brad is banking $28k into his 401(k) each year. With a 6% return, Brad would have a little over $1 million in 20 years. Not too shabby.
Not only is Brad balling at his day-job, he is a landlord with multiple rental properties. Because he is hustling hard on the side, Brad can take income made from his rental property business and contribute up to an additional $26k as a nonelective contribution to get him to $54k – the overall limit contribution for 401(k)s.
Related: Great article on how Financial Panther leverages the solo 401(k) to save his side hustle income.
Again, the key to a Solo 401(k) is having a side hustle. If you have one job and are utilizing the 401(k) that is offered – good for you! Now, if you are saving into your 401(k) at your day job and you are hustling by night, use this strategy to contribute beyond $18,000 into your 401(k).