Happy Memorial Day, everyone! A special thank you to all of the veterans out there – I greatly appreciate what you do for our country. Today’s post is relatively short and sweet. I touch on the importance of an employer match in your 401(k). The second item I cover is the solo 401(k) and how you can take advantage of it to save up to $54k per year.
A few weeks back my wife and I were hanging out with some of her graduate school friends. These ladies work in higher education and the topic of benefits came up. I was happy to hear that they were making the minimum contributions to their 401(k) to receive the match from the institutions they work for. Great job, ladies!
The money you receive from an employer match is free money. The only thing you need to do to get this free money is contribute to your 401(k). Some employers match 100% of what you contribute – so check with your HR department to understand what is offered.
Let’s use a salary of $100,000 for easy, round numbers.
- Some employers match a full percentage as long as you contribute to your 401(k). Let’s say they match 5% if you contribute at least 5%. Then, you would receive $5,000 from your employer for a total yearly contribution of $10,000.
- Other employers make it more complicated. They may match half of what you contribute up to a certain percentage. A former employer of mine matches 1/2 of what you contribute up to 8%. So if you contribute 8%, your employer matches with 4%. Therefore, you have a yearly contribution of $12,000.
Employer contributions do NOT count toward the yearly 401(k) max
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:
- elective deferrals
- 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.
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).
Please note that I am not an expert in this area. I received my information for the IRS.GOV website. I am a firm believer in the moto: trust, but verify.