How to Maximze Your 401(k) Deductions-S Corporations

October 21st, 2014 at 11:42 AM

A  Solo 401(k) plan is an excellent retirement and tax planning tool. To facilitate your understanding of how S Corporation income can be contributed to a 401(k) plan, you need to understand the following three basic rules.

  1. Only W-2 Salary can be used as a base for contributions to a 401(k). Dividends or net profit income that are included in your K-1 is not included. The contribution limit is $19,500 or $26,000 if you are over 50 years old.
  2. Easy Elective Salary Deferral Limit of $19,500 or 100% of W-2 income, whichever is less. In other words, if you have $19,500 of salary income, you can contribute that amount to your 401(k) account. Every employee under the plan is entitled to the same contribution amount. In some cases, it makes sense to include your wife as an employee to benefit from a potential $19,500 contribution to your spouse’s account.
  3. Non-Elective Deferral of 25% of income up to a $52,000 total annual 401(k) deduction. In addition to the $19,500 annual elective salary contribution, an S Corporation owner can contribute 25% of their salary compensation to their 401(k) account to a maximum $63,500 tax deduction. So, let’s say your S Corporation’s salary is $50,000; the elective Deferral is $19,500, and the Non-Elective Deferral is $12,500 ( 25% of 50,000), totaling $30,000. In order to maximize the elective and non-elective deferral amount of $52,000, you W-2 salary would need to be $138,000.

Please be advised that the additional 25% non-elective deferral contribution is best used in owner only 401(k) plans, and their spouse due to the matching of this contribution for employees.

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