How Small Business Owners Can Maximize Their Own 401(k) Contributions

As a small business owner, you're used to wearing multiple hats every day. From sales and operations to HR and finance, the responsibility for your company's success rests squarely on your shoulders. But here's a question worth asking: Are you investing the same energy in your own financial future as you are in your business?

For many entrepreneurs, retirement planning takes a backseat to business growth. That's understandable—but it's also a missed opportunity. Your 401(k) isn't just another expense; understanding how small business owners can maximize their 401(k) contributions is a game-changer for retirement savings and a powerful wealth-building tool that offers unique advantages for small business owners.

The Dual Role Advantage: Being Both Employer and Employee

One of the most significant retirement planning advantages for small business owners is often overlooked: you can contribute to your 401(k) as both an employer and an employee. This dual-contribution capability creates a significant opportunity to supercharge your retirement savings while potentially reducing your tax burden.

Let's break down how you can make the most of this unique position.

Understanding Your 2025 Contribution Limits

Before diving into strategies, let's clarify the numbers. For 2025, here's what you need to know:

• Employee Contribution Limit: $23,500 (standard deferral)

• Catch-Up Contribution (age 50+): Additional $7,500

• NEW Catch-Up Contribution (ages 60-63): Up to $11,250

• Total Employer + Employee Contribution Limit: $69,000 (or $76,500 if you're 50+)

These numbers represent a significant opportunity to build wealth, especially when considering that most employees typically have access only to the employee contribution portion.

Choosing the Right 401(k) Plan for Your Business

Not all 401(k) plans are created equal, and selecting the right one can make a substantial difference in your ability to maximize contributions.

Solo 401(k): The Power Player for One-Person Businesses

If you're a solopreneur with no full-time employees (besides perhaps your spouse), the Solo 401(k) offers remarkable flexibility:

• Contribute as both employer and employee

• Potentially lower administrative costs

• Simplified reporting requirements (no Form 5500 until assets exceed $250,000)

• Loan provisions available (if your plan allows)

Safe Harbor 401(k): For Businesses with Employees

If you have employees, a Safe Harbor 401(k) might be your best option. While it requires you to make specific contributions for eligible employees, it offers significant benefits:

• Automatically passes non-discrimination testing

• Allows you, as the owner, to maximize your own contributions

• Creates a valuable benefit to attract and retain top talent

• Employer contributions are tax-deductible as a business expense

How Small Business Owners Can Maximize Their Own 401(k) Contributions

Now that we understand the basics let's explore specific strategies to help you maximize your 401(k) contributions.

1. Contribute in Both Capacities

As a small business owner, your superpower is the ability to contribute in two ways:

As an Employee: Contribute up to $23,500 ($31,000 if age 50+, or potentially $34,750 if age 60-63) through salary deferrals.

As an Employer: Add profit-sharing contributions of up to 25% of your compensation, up to the combined limit.

For example, if you pay yourself $150,000 in W-2 wages, you could potentially contribute:

• $23,500 as an employee deferral

• Up to $37,500 as an employer contribution (25% of $150,000)

• Total: $61,000 for retirement in just one year

2. Consider After-Tax Contributions

Some 401(k) plans allow for additional after-tax contributions beyond the standard limits. While these don't provide the immediate tax benefits of pre-tax contributions, they still grow tax-deferred and can significantly boost your retirement savings.

This strategy works particularly well if your plan allows in-plan Roth conversions, creating what's sometimes called a "mega backdoor Roth" opportunity.

3. Time Your Contributions Strategically

Instead of waiting until year-end to make employer contributions, consider implementing a regular contribution schedule. This approach offers two advantages:

• Dollar-cost averaging into the market throughout the year

• Ensuring you don't miss contribution opportunities if cash flow becomes tight

4. Leverage Tax Credits for Plan Setup

The government wants to encourage retirement planning, so it offers tax incentives for small businesses establishing new plans:

• Tax credit of up to 50% of qualifying startup costs, up to $5,000 annually for three years

• An additional $500 credit is available for implementing automatic enrollment

• These credits effectively reduce the cost of providing retirement benefits

Common Mistakes to Avoid

Even savvy business owners can overlook opportunities to maximize their 401(k) contributions. Here are pitfalls to watch for:

1. Miscalculating Contribution Limits

The calculation for employer contributions depends on your business structure. If you're an S-corp owner, your contributions are based on your W-2 wages. If you're a sole proprietor, they're based on your net self-employment income after deducting one-half of your self-employment tax and your 401(k) contribution.

Getting this calculation wrong could result in excess contributions and potentially lead to penalties.

2. Missing Catch-Up Contribution Opportunities

If you're 50 or older, don't overlook the additional $7,500 catch-up contribution. And if you'll be between the ages of 60 and 63 in 2025, be sure your plan incorporates the new enhanced catch-up provision that allows for up to $11,250 in additional contributions.

3. Forgetting Plan Administration Requirements

Even solo plans have requirements, including:

• Adopt your plan by December 31st to make contributions for that tax year

• Making employee deferrals promptly after each payroll

• Filing Form 5500 when required

• Keeping plan documents current

4. Neglecting Regular Compensation Planning

Your ability to maximize 401(k) contributions depends partly on how you pay yourself. Regular reviews of your compensation structure help ensure you're optimizing for retirement contributions while maintaining appropriate cash flow.

Implementation: Your 5-Step Action Plan

Ready to maximize your 401(k)? Here's your roadmap:

Step 1: Choose the Right Plan Structure

Consult with a financial advisor to determine which 401(k) structure best fits your business model and retirement goals. At The 401(k) Advisor, we specialize in helping small business owners navigate these critical decisions.

Step 2: Establish Your Contribution Strategy

Determine how much you'll contribute as both employee and employer, and establish a system to ensure consistent funding.

Step 3: Calculate Your Maximum Allowable Contribution

Work with your financial advisor and tax professional to determine the exact amount you can contribute based on your business structure, income, and age.

Step 4: Implement Automatic Contributions

Set up systematic contributions throughout the year rather than waiting until tax time.

Step 5: Schedule Annual Reviews

As your business grows and tax laws change, regularly review your 401(k) strategy to ensure you're still maximizing your benefits.

Beyond the Basics: Advanced Considerations

While maximizing contributions is important, don't overlook these additional factors:

Investment Allocation Matters

Contributing the maximum amount is only part of the equation. How those funds are invested will significantly impact your long-term results. Consider consulting with a financial advisor to develop an investment strategy tailored to your retirement timeline and risk tolerance.

Plan for Required Minimum Distributions (RMDs)

Remember that traditional 401(k) accounts will eventually require minimum distributions starting at age 73 (or 75, depending on your birth year). Factor this into your long-term tax planning.

Consider Roth Options

Many 401(k) plans now offer Roth contribution options, which provide tax-free growth and withdrawals in retirement. For some business owners, splitting contributions between traditional and Roth can provide valuable tax diversification.

The Bottom Line

As a small business owner, you've built something special. Your entrepreneurial drive has created not just a business but opportunities for yourself, your family, and perhaps your employees. That same determination can help you build an equally impressive retirement nest egg when you harness the full power of your 401(k).

By understanding your unique contribution advantages, choosing the proper plan structure, and implementing a consistent strategy, you can significantly outpace the retirement savings of the average employee. The key is to take action now and review your approach regularly as your business evolves.

Remember: The most successful entrepreneurs don't just build thriving businesses—they build thriving lives for themselves after business. Your 401(k) is a powerful tool to help ensure your hard work today continues to reward you long after you've handed over the keys to your business.

Need help developing a personalized 401(k) maximization strategy? Start your journey with Forefront Wealth Partners today, and let's make sure your retirement plan is working as hard as you are.

Investment advisory services provided through Forefront Wealth Partners. Investing in securities involves risks, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. This article was generated with the assistance of artificial intelligence and subsequently reviewed and edited by a human financial advisor to ensure accuracy and relevance. While AI can help synthesize information and generate content, it does not replace the expertise and judgment of a qualified financial professional.