If you are a W2 employee, your limit for the 401K for 2022 is $20,500. This is not the total amount that can be contributed to your 401K, but rather specifically it is the maximum of your portion, called the “employee elective” (EE) contribution. By rules, EE contribution for 2022 is $20,500 max per individual regardless how many employers you may have with 401K plans. For instance, if you work for two employers and instructed each to contribute $20,500, they will each do so, and rarely do they check whether you have other employers. However, you would have erroneously contributed $41K, and in doing so, the IRS may be alerted as the amount of contribution is noted on your W2.
The other portion of the 401K, which employee often cites is the company’s “match”, is called the “profit sharing” (PS) contribution. The total combined amount that can be contributed to the 401K for 2022 is $61K ($67.5K for age 50+). On a previous post, I mentioned it’s possible to surpass the $20.5K limit for 401K contribution. This is done by taking advantage of the PS contribution. No, it’s very unlikely you will convince your employer to give you more PS. So the only way to do it, is to establish non-W2 earned income (SE for self employed). Please note, this is not passive (ie real estate, royalties) nor portfolio income (ie interest, dividends).
Breaking it down, EE is the individual’s portion that cannot surpass $20,500 per individual for 2022. However PS is from the employer, and you can have separate PS for each employer. Assume someone is only self employed, then they contribute both the EE and PS for themselves in a Solo 401k plan up to $61K. However, assume you already contributed $20,500 EE contribution to your employer’s 401K plan, you can contribute another $61K through your SE via only the PS portion of your SE 401k Plan. That’s $81,500 per individual!
Being a W2 employee is very limiting on what you can do financially. Here I am referencing 401K, but separately there’re a lot of tax advantages as well to being SE. While being a W2 employee offers a lot of protections (paid leave, paid time off, overtime, unemployment, unions, etc), it is not very conducive to building wealth. I’m not saying you need to be an entrepreneur and start a business, nor do you need to quit your W2 job. But at minimum, if you are a W2 employee you need to step out of the “employee mindset” comfort zone if you are serious about building wealth.
I network with many self made multi-millionaires, many of whom are FIRE’d. However, some of them choose to work once or twice a month in the gig economy, such as driving for Uber. It must be because driving for Uber pays so well right (sarcasm)? No, it’s simply because getting a little SE income allows them to utilize the Solo 401K. That is how powerful this strategy is.
