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Asked 12/17/2007
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Is Individual 401k Max based on W2 Wage or Net Income? I started an "S-Corp" this year. I am the only employee. I paid myself a salary of $55,000, but I estimate another $65,000 in net profit for a total income of $120,000 this year. I have an individual 401k, to which I contributed $14000 as an employee and $13000 as an employer. Is my contribution limit based on my w-2 "wages"; which I think will be $55,000, or is it based on the $120,000 which combines my salary with my business net income? |
Answer 1/3 - Submitted 12/17/2007
I don't think the max is based on your income at all, it is a limit put on by the Federal government and not tied directly to your income.
Answer 2/3 - Submitted 12/17/2007
It's based on W-2 earnings. For 2007, you can contribute up to $15,500 of W-2 earnings. If you're 50 or older, you can contribute an additional $5,000
For an S corporation, you can also make a profit sharing contribution of up to 25% of W-2 earnings.
The total maximum contribution (salary deferral plus profit sharing) is $45,000 ($50,000 is you're 50 or older).
Answer 3/3 - Submitted 12/17/2007
It's based upon the $55,000 salary. Pass thru compensation is not includable in your compensation for contribution and testing purposes. Basically look at it like...if you want to get use of it in the retirement plan then you're going to have to pay the payroll taxes. At your income level you're only slightly ahead in making the contribution (ie your tax savings are only slightly more than the taxes you pay). You've pretty much maxed your contribution unless you pay yourself more of a salary on thelast paycheck or pay yourself a bonus.
As your income grows you will go up in tax rate and you will want to increase your w-2 wages and put more away.
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