What will my second-year contribution look like?

In year two, you’ll receive a minimum, maximum, and target contribution amount. If you funded at a level tied to your compensation, year-two contributions often range from about 10% below to 50% above year-one, giving you flexibility.

Your actual amount depends on investment returns and your W-2 or business profits.

How do contributions work for sole proprietors?

Sole proprietors don’t earn W-2 wages. Actuaries calculate a “deemed wage,” usually 50–75% of your profit, to determine contributions.

What if my income is inconsistent?

If your income varies year to year, you have options:

• Adjust compensation (S-Corps): Lower W-2 → lower contribution (must still be “reasonable”).

• Fund at the low end of the range: Gives flexibility in down years.

• Amend the plan: You can reduce future benefits, but not after employees have completed 1,000 hours for the year.

What are the limits on cash balance contributions?

There’s no fixed yearly limit. Contribution targets change annually because the goal is to reach a maximum benefit at retirement (up to ~$3.6M).

You may see a target like $150k, with a range of $75k–$400k, giving you flexibility.

Can I get 85–90% of contributions as the owner if I have many employees?

Large companies with many older, high-income employees usually cannot allocate 85–90% to the owner. These plans work best for owners with <10 employees unless the goal is primarily an employee benefit.

What does my funding range mean?

Your actuary provides a minimum and maximum. Funding the middle keeps future ranges flexible. Funding low every year increases future required minimums; funding high every year lowers future maximums.

I overfunded my SEP or 401(k). How do I fix it?

Contact your custodian immediately. They will remove excess contributions plus earnings and issue a 1099-R. Earnings are taxable; the excess contribution itself is not. Don’t deduct the excess.

Are contributions fixed every year?

No. Contributions rise or fall with profits/W-2 income and investment results. You’ll have a flexible annual range—for example, $50k–$100k on a $75k recommendation.

How does prior-year service funding work?

You can make a one-time “opening credit” for past service, deductible this year. This increases contributions but applies to all eligible employees, even former ones.

Do 401(k) contributions have to be made before year-end?

• Employee deferrals: Must be elected by year-end. Deposit rules vary for owners vs. non-owners.

• Profit sharing: Can be made by tax-filing deadline (including extensions).

Do I need a 5-year commitment?

No. Plans are “permanent” in IRS terms but can be terminated for reasonable cause anytime. Most last 5–7 years. Funding targets generally grow 4% per year, influenced by age, compensation, and investment returns. Conservative investing helps keep future ranges stable.

How can I make larger contributions?

You may be able to increase contributions by:

• Raising your W-2 (up to ~$275k without employees; ~$345k with employees).

• Adding/increasing spousal compensation so they can also participate.

Can I pre-fund early in the year?

We don’t recommend it—too many unknowns (investment results, compensation, IRS updates, final targets).

My CPA says I can contribute $275k per year. Correct?

No. $275k is the IRS benefit limit, not the yearly contribution limit. It’s the maximum annual retirement benefit starting at retirement age, which translates to about $3.6M allowed in the plan. Actual yearly contributions can be higher or lower depending on your situation.

Does timing of the deposit matter?

You have until your tax-filing deadline (up to 8½ months after year-end).

Can I boost my contributions by adding my spouse to the plan? What are the pros and cons? Adding your spouse can significantly increase total household retirement contributions. Your spouse can make the full 401(k) employee deferral ($30,500 in 2024) and receive a cash balance plan contribution based on their W2 wage. Their W2 also reduces overall business profit, which can help optimize funding levels.

In some cases, adding your spouse may require giving plan access to other employees if eligibility rules apply. There is also an extra administrative fee for adding them. But for most owners, the increased contribution potential far outweighs the added cost.

Is there a quick way to determine if my defined benefit plan is overfunded?

Yes. You can compare the investment balance on the Form 5500 to the actuarial benefit in the year end valuation reports.