Do 401(k) Contributions Have to Come From Payroll? – Avoid This Mistake + FAQs

Over 70 million Americans actively participate in 401(k) plans to build their retirement nest eggs.

Yet, a common question arises: do those contributions have to come directly out of your paycheck, or is there another way to add money? Whether you’re a nine-to-five employee or a self-employed entrepreneur, understanding how (and if) you can fund a 401(k) outside of payroll is key to maximizing your retirement savings.

If you’ve ever received a windfall or extra savings and wished you could dump it into your 401(k) all at once, you’re not alone 😕. Let’s clear up the confusion.

In this guide, you’ll learn:

• Federal Rules for 401(k) Contributions: Why the law generally limits 401(k) contributions to payroll deductions (and what that means for you).
• Employer-Sponsored vs. Solo 401(k) Plans: How contribution rules differ when you’re self-employed with a solo 401(k) versus a traditional workplace plan.
• Key 401(k) Terms Explained: Jargon like elective deferrals, employer match, Roth 401(k) contributions, and more – broken down in plain English.
• 🔎 Different Contribution Scenarios: Real examples of contributing via payroll, handling multiple jobs, using a windfall, and what happens if you try to contribute outside a paycheck.
• Pros, Cons, and Pitfalls: A quick comparison of retirement saving options (with a handy table 👍), plus common mistakes to avoid and FAQs answered.

⚖️ Federal Law: 401(k) Contributions Must Come From Your Paycheck

Under federal law, 401(k) contributions by employees have to be made through a payroll deduction from their wages. When you sign up for your employer’s 401(k), you’re instructing them to take a portion of each paycheck and deposit it into your 401(k) account.

This isn’t just company policy – it’s baked into the legal definition of a 401(k) plan.

Why is this required? Because contributions to a 401(k) enjoy special tax treatment, the IRS insists that the money come from compensation you haven’t actually received in-hand yet.

In other words, you can’t take cash that’s already sitting in your bank account and retroactively shove it into a 401(k) for a tax break. The contribution has to be siphoned out before you get paid, which is exactly what a payroll deduction does.

Legally, a 401(k) is a type of “cash or deferred arrangement.” You’re effectively deferring (postponing) receiving some of your cash compensation and having it directed to your retirement plan instead. Once that compensation has been paid directly to you (your checking account, say), it’s no longer eligible to be deferred into the plan.

Federal law also defines what counts as compensation for 401(k) contribution purposes. This typically includes your wages, salary, bonuses, commissions, and other taxable earned income from employment. It doesn’t include things like investment income, interest, or gifts. So if your money isn’t coming from work you do, it can’t go into a 401(k) as a new contribution.

Practically speaking, any contribution you make to a workplace 401(k) shows up as a deduction on your pay stub. Your employer withholds that amount from your paycheck and sends it to the 401(k) plan on your behalf. You never touch the money – and that’s by design, to keep things tax-advantaged and simple.

One notable exception to the “payroll only” rule is rollovers. If you have money from a previous retirement account (like an old employer’s 401(k) or a rollover IRA), you can roll that into your current 401(k) plan. However, a rollover isn’t considered a new contribution; it’s just transferring existing retirement funds from one account to another.

Doing a rollover doesn’t increase your contribution limit for the year or give you a tax deduction – it’s merely a way to consolidate or continue growing money that’s already in the retirement system.

Aside from rollovers, there’s really no mechanism in a standard 401(k) plan to deposit personal funds outside of payroll. Your plan administrator won’t accept a random check from you saying “please add this to my 401(k).”

If you come into extra cash and want to put it toward retirement, the typical advice is to either increase your 401(k) payroll contribution rate going forward (and use that extra cash to cover your expenses in the meantime) or put the money into an IRA. The bottom line for traditional 401(k)s: new contributions = money from your paycheck.

It’s also important to mention that not all money going into your 401(k) comes out of your paycheck. Specifically, employer contributions (like matches or profit-sharing deposits) are funded by the company, not by reducing your salary.

Many employers will match a portion of your contributions or contribute a flat amount to your 401(k). These funds are deposited directly by the employer into your account. They’re still tied to your compensation (for example, a common match might be 50% of what you contribute, up to 5% of your salary), but they don’t cost you any of your own paycheck.

In other words, employer contributions are an outside source of money that boosts your 401(k) – but you as an individual can’t just put in extra outside money on your own.

Remember, federal law also imposes annual limits on how much you can contribute to a 401(k). For 2023, an employee’s salary deferrals are capped at $22,500 (or $30,000 if you’re 50 or older, thanks to catch-up contributions). This limit applies across all your 401(k) plans collectively, no matter how many jobs you have.

You also can’t contribute more than your total compensation. There’s an overall cap (including employer contributions) of $66,000 in 2023 (or $73,500 with catch-up for those 50+). These rules ensure that even if you wanted to add extra money, you’re legally constrained by your earnings and the dollar ceilings – for example, you can’t earn $30k and somehow contribute $60k by throwing in outside funds.

Solo 401(k)s for the Self-Employed: Funding Retirement Without a Paycheck

Solo 401(k) plans (a.k.a. one-participant 401(k)s) are designed for self-employed individuals and small business owners with no employees (other than perhaps a spouse).

If you don’t receive a formal paycheck from an employer, you might wonder how you can possibly contribute to a 401(k). The good news is that you can – the idea of “coming from payroll” just translates a bit differently when you’re the boss.

In a solo 401(k), you essentially wear two hats: employee and employer. As the “employee,” you can make elective deferral contributions just like any worker would via a paycheck.

As the “employer,” you can also make an additional contribution (often referred to as a profit-sharing contribution) based on your business’s profits. This dual contribution role allows self-employed folks to potentially save a lot in the plan.

If you’re a sole proprietor or a single-member LLC (taxed as a disregarded entity), you likely don’t pay yourself a W-2 wage. Instead, your compensation is your net self-employment income – basically, your business’s profit after expenses and half of your self-employment tax.

You can still contribute to a 401(k) up to the allowed limits, but instead of a “payroll deduction,” you contribute out of those profits. In practice, you determine how much you want to contribute and then make a deposit of that amount into your solo 401(k) account (usually by writing a check or transferring from your business bank account to the 401(k) trust account).

There are some calculations involved for solo 401(k) contributions. For the “employee” portion, you can contribute up to 100% of your earned income from the business, up to the annual limit (e.g., $22,500 for 2023).

Then, for the “employer” portion, a sole proprietor can contribute roughly 20% of net self-employment earnings (there’s a formula to account for the fact you’re contributing for yourself). Combined, these contributions can be quite large.

For example, if your freelance business netted $80,000 in profit, you could potentially contribute $22,500 as the employee, plus around $16,000 as the employer (approximately 20% of $80k), for a total of about $38,500 into your solo 401(k). (If you were 50+, you could add an extra $7,500 catch-up contribution on top of that.) This far exceeds what you could do with an IRA, showcasing a big advantage of the solo 401(k).

It’s important to note that even without a traditional paycheck, you still have deadlines for contributions. Generally, you must make your elective deferral choice (the “employee” portion of your solo 401(k) contribution) by December 31 of that year. In practice, you would document something like, “I elect to contribute $X of my 2025 self-employment earnings to my 401(k)” by the end of 2025.

You don’t necessarily have to deposit the money by that date. If you’re a sole proprietor, you often have until your tax filing deadline to actually fund the contribution. But you do need the plan set up and that election made on time.

The “employer” profit-sharing contribution can be determined and contributed by your business’s tax filing deadline (for example, April 15 of the next year, or later if on extension). This setup differs from a regular job where contributions happen automatically each payday, but the principle is the same – you can’t wait until after the year ends to decide you want to contribute for that year.

What if your business is structured as a corporation (S-corp or C-corp) and you pay yourself a salary through payroll? In that scenario, contributing to a 401(k) looks much like it does for any employee: you must run your 401(k) contributions through your W-2 pay.

You cannot use a shareholder distribution or dividend to fund the 401(k), because those payments aren’t considered “earned income” for retirement plan purposes.

S-corp owners sometimes trip up on this. If you only take, say, $100,000 in distributions and zero salary, you’ve got $0 eligible compensation for a 401(k) contribution. The IRS has made it clear that only actual wages count as compensation.

So if you have an S-corp, be sure to pay yourself a reasonable wage and defer some of that into the 401(k) via the payroll system. In other words, even as a business owner, you need a paycheck (or at least net self-employment income) to put money into a 401(k).

In summary, a solo 401(k) doesn’t require a traditional payroll processor or an employer cutting you a paycheck, but contributions still must come from your earned income from the business.

If you have no business profits or wages in a year, you can’t contribute for that year. If you do have earnings, you have the freedom to contribute a portion of them to your 401(k) – effectively playing both employee and employer roles to maximize your retirement funding.

State-Specific Nuances: Taxes and Other Rules That Vary by State

Retirement plans like 401(k)s are governed primarily by federal rules, meaning the core contribution requirements are the same no matter where you live.

However, there are a few state-specific nuances that can affect how your 401(k) contributions are handled or how they benefit you. These differences won’t change the fundamental rule that contributions come from payroll/earned income, but they might impact your taxes or the implementation of your contributions.

State income tax treatment: Most states follow the federal tax treatment for 401(k) contributions – if you put in pre-tax dollars, those contributions are not counted as taxable income on your state return either. But not every state does this. Notably, Pennsylvania does not exclude traditional 401(k) contributions from state income tax.

So if you live in PA, even though your 401(k) contribution is pre-tax for federal purposes (reducing your federal taxable income), Pennsylvania will still tax that money in the year you earned it. The upside for Pennsylvanians is that qualified withdrawals in retirement from a 401(k) are then state-tax-free (since you effectively already paid state tax on the contributions).

Another example is New Jersey: New Jersey generally aligns with federal law in excluding 401(k) contributions from income (they changed this back in the 1980s), but they do not give a state tax break for traditional IRA contributions. The key point is, be aware of your own state’s tax rules – in most places your 401(k) payroll contributions are tax-deferred at both federal and state levels, but in a few places you might still see state tax taken out of your paycheck for those contributions.

Wage deduction laws: States also have various labor laws about what can be deducted from an employee’s paycheck. A 401(k) contribution is a voluntary deduction for the employee’s benefit, which is generally allowed as long as the employee authorizes it.

When you enroll in your 401(k) and choose your contribution percentage, you’re providing this authorization. Some states, for example, require written consent for any deduction that isn’t required by law. Fortunately, a 401(k) deduction is one that employees opt into, and the paperwork (or online enrollment) you complete satisfies these requirements.

Just know that your employer can’t legally deduct money for a 401(k) without your agreement; it’s meant to be voluntary (except in cases of automatic enrollment, where you still have the right to opt out).

State retirement savings programs: In recent years, some states have launched their own retirement savings programs for workers who don’t have access to an employer-sponsored plan. California’s CalSavers, OregonSaves, Illinois Secure Choice, and others are examples.

These are typically Roth IRA programs that employees are auto-enrolled in, with contributions coming from payroll deductions. While these are not 401(k)s, they reflect a trend at the state level: using payroll to facilitate retirement contributions.

If your employer doesn’t offer a 401(k) and you’re in a state with such a program, you might find money coming out of your paycheck for a state-run IRA unless you opt out. The big picture is that whether it’s a 401(k) or a state-mandated alternative, payroll deduction is the common method for getting workers to save for retirement.

Creditor protection and other nuances: Some states provide additional protections or rules around retirement accounts that go beyond federal ERISA protections. For example, 401(k) plans are generally shielded from creditors under federal law, but if you’re in a lawsuit or bankruptcy, state laws might offer extra layers of protection for IRAs or other accounts.

In a divorce, states might have different ways of handling 401(k) assets via qualified domestic relations orders (QDROs). These aspects don’t directly affect how you contribute, but they’re part of the state-by-state differences in retirement planning.

No state, however, can change the basic contribution rules of a 401(k) – those are set federally. So you won’t find a state where you can just write a personal check to your 401(k) skipping the payroll step, for instance.

Key Terms to Know for 401(k) Contributions

To fully grasp 401(k) contribution rules, it helps to understand some of the jargon that gets thrown around. Here are key terms related to 401(k) contributions, explained in plain language:

• Compensation (Earned Income): In the 401(k) world, compensation means the income that counts for making contributions. For a regular employee, this is your wages or salary (plus things like bonuses or overtime, if your plan counts them). For a self-employed person, it’s your net profit from the business. You can only contribute up to the amount of compensation you have — you need earned income to put money into a 401(k).
• Elective Deferral (Salary Deferral): This is the fancy term for the portion of your pay that you choose to contribute to the 401(k) rather than take home. It’s “elective” because you elect (choose) to do it, and “deferral” because you’re deferring receipt of that income. These contributions can be pre-tax or Roth (after-tax) depending on what you choose.
• Payroll Deduction: The mechanism by which elective deferrals are taken out. Your employer deducts your chosen contribution amount from each paycheck and sends it to the 401(k) plan. It’s automatic once you set your contribution rate. If you’re self-employed without a formal payroll, think of it as you deducting it from your “pay” (profits) when you contribute to your solo 401(k).
• Pre-Tax Contribution: A 401(k) contribution made with pre-tax dollars, which means it’s taken out of your pay before income taxes are applied. This is the traditional 401(k) contribution. It lowers your taxable income for the year — money goes into the 401(k) instead of being taxed on your paycheck. You’ll pay taxes on these contributions later when you withdraw them in retirement.
• Roth 401(k) Contribution: A contribution made with after-tax dollars into the Roth side of a 401(k) (if your plan offers it). You pay income tax on that money now (it comes out of your paycheck after tax withholding), but it will grow tax-free, and qualified withdrawals in retirement from the Roth 401(k) are tax-free. Despite being after-tax, Roth 401(k) contributions are still made via payroll deduction; you just designate them as Roth, and your employer withholds taxes as usual on that amount.
• After-Tax Contribution (Non-Roth): Some 401(k) plans allow after-tax contributions beyond the Roth or pre-tax limits. These are also made from your paycheck after taxes. They don’t give you a tax break now, and they’ll be taxable only on the earnings when withdrawn. People sometimes use these to do a “mega backdoor Roth” (contributing after-tax and then converting to Roth within the plan or via rollover). Like other contributions, they must come from compensation through payroll.
• Employer Match: This is free money your employer contributes to your 401(k) to encourage you to save. A common formula might be something like “50% match on the first 6%” – meaning if you contribute 6% of your salary, they’ll add an extra 3% (half of 6%). Employer match contributions are not taken out of your pay; they are additional funds your employer deposits. However, they usually depend on you contributing (you only get the match if you put in your portion from your paycheck).
• Employer Nonelective Contribution (Profit-Sharing): This is when your employer contributes to your 401(k) regardless of whether you contribute yourself. For example, an employer might put in 5% of each employee’s salary into the 401(k) at year-end as a profit-sharing contribution. Again, this is money from the company’s coffers going into your account. It doesn’t reduce your paycheck, but it does count toward your overall contribution limit for the year.
• Contribution Limits: These are the caps set by law on how much can be contributed to your 401(k). There are two main limits: the elective deferral limit (for 2023, $22,500; for 2024, $23,000, etc.), which is how much you can put in as an employee; and the total contribution limit (for 2023, $66,000, or $73,500 including catch-up if 50+), which includes your contributions plus any employer contributions. Also, as mentioned, you can’t contribute more than 100% of your compensation.
• Catch-Up Contribution: An extra amount people aged 50 or older are allowed to contribute on top of the usual limits. In 2023, the catch-up limit is $7,500. So a 52-year-old could put in $22,500 + $7,500 = $30,000 of their own money. Catch-up contributions recognize that folks closer to retirement might want to save more. Like any other 401(k) contribution, catch-ups have to come from payroll deductions (or self-employment income), not from unearned income.
• Rollover: This is when you move funds from one retirement account to another. For example, if you leave a job, you might roll over your old 401(k) into your new employer’s 401(k) or into an IRA. Rollovers can be direct (plan-to-plan transfer) or indirect (you take a check and deposit it within 60 days). Importantly, rollovers into a 401(k) are not new contributions – they don’t count against your limits and they aren’t coming from your current payroll. It’s just relocating money that’s already in a tax-advantaged status. Still, rollovers must be handled according to IRS rules to avoid taxes (e.g., you can’t just mix the money with your personal funds in between).

Real-Life Examples of 401(k) Contribution Situations

Sometimes examples make things clearer. Here are a few scenarios illustrating how 401(k) contributions work in real life:

Example 1: Using a Windfall to Increase 401(k) Savings – Alice gets a $5,000 tax refund and wants to put that extra money into her 401(k) this year. Her 401(k) plan won’t accept a direct personal check for a contribution, because it’s not coming through payroll.

So, Alice talks to her HR and increases her 401(k) contribution percentage for the rest of the year. This way, more of each of her upcoming paychecks will go into the 401(k). Over the next few pay periods, she effectively shifts an additional $5,000 of her salary into the 401(k) (spread out across checks). Meanwhile, she uses her tax refund money to help pay her bills (since her take-home pay is now lower due to the high 401(k) deductions).

By year-end, Alice has funneled that extra $5,000 into her 401(k) – not by depositing the refund itself, but by leveraging the payroll system to get an equivalent amount of her earnings into the plan.

Example 2: Maxing Out via Payroll Adjustments – Brian decides mid-year that he wants to max out his 401(k) contributions. In the first half of the year, he was contributing 5% of his salary each paycheck. To reach the annual limit of $22,500, 5% won’t be enough.

Brian calculates that he’ll need to contribute a much larger percentage of each remaining paycheck to hit the target by December. He cranks up his contribution rate to, say, 20% of his paycheck for the rest of the year. His paychecks shrink, but his 401(k) balance grows much faster. Brian essentially “catches up” on contributions by using the payroll system aggressively in the latter part of the year.

He couldn’t simply write a one-time check to catch up – he had to use the payroll mechanism – but by adjusting the percentage, he achieves the same goal. (One caveat: some employers cap the percentage of pay you can contribute or require contributions each pay period, so plan ahead. Brian made sure with HR that he could go as high as 20% for the remaining months.)

Example 3: Two Jobs, Two 401(k)s – Carol works two jobs, both of which offer a 401(k) plan. Job A is full-time for part of the year and Job B is her job for the rest of the year. She wants to maximize her retirement savings. Carol can contribute to both 401(k) plans, but she must keep track of the total.

Suppose she contributes $10,000 to the 401(k) at Job A during the months she worked there. Now at Job B, she has up to $12,500 she can still contribute (assuming the $22,500 annual limit) for the remaining months of the year. She sets up contributions at Job B accordingly.

Each employer’s plan only knows about the money from its own payroll, so it’s on Carol to ensure she doesn’t exceed the combined limit. Also, note that Carol cannot take money earned from Job A and directly put it into Job B’s 401(k) or vice versa – each plan only accepts contributions from that employer’s payroll.

If one of Carol’s jobs did not have a 401(k) at all, she could not “borrow” the other job’s 401(k) to contribute extra; instead, she might use an IRA to invest income from the non-401(k) job.

Example 4: Self-Employed 401(k) Contributions – David is self-employed and has a solo 401(k). He has no employer withholding a paycheck for him. This year, after tallying business income and expenses, his net profit from self-employment is $100,000. David decides to contribute to his solo 401(k) for the year. As the “employee,” he can put in up to $22,500.

He chooses to contribute the full $22,500 (because he wants to maximize his tax-advantaged savings). As the “employer,” he can also contribute up to 20-25% of his profit. With $100,000 of profit, 25% would be $25,000 (if he were an S-corp paying himself salary; if he’s a sole prop, the calc is a bit under 20% after adjusting for the self-employment tax deduction, roughly $18-20k). Let’s say David, being a sole proprietor, figures he can do about $18,500 as an employer contribution. He goes ahead and puts in that amount too.

In total, David contributes $22,500 + $18,500 = $41,000 to his solo 401(k) for the year. He didn’t receive a single paycheck; instead, he wrote checks or transferred funds to his 401(k) account reflecting those contribution amounts. Come tax time, he’ll report those contributions – the $22,500 as an “employee” deduction on his individual tax return and the $18,500 as a business expense for the employer portion.

David thus uses his business earnings to fund a substantial 401(k) contribution, all without a traditional payroll. (If David had an S-corp instead, he would have needed to run at least $22,500 of his pay through payroll to do the same thing, plus have the company contribute the rest. The end result on contributions could be similar; the mechanics differ.)

Example 5: Employer Contribution Outside of Payroll – Elaine works for a company that had a stellar year, and management decides to share the wealth via the 401(k) plan.

They announce a one-time profit-sharing contribution of 5% of salary to every employee’s 401(k) account. Elaine earns $60,000, so she gets an extra $3,000 deposited into her 401(k). This $3,000 did not come out of her paycheck – it was straight from the company’s profits. It appears in her 401(k) statement as an employer contribution.

Elaine still contributed her own 5% each paycheck during the year (which was $3,000 of her own money via payroll). Now with the employer’s $3,000, she has $6,000 contributed in total.

The key takeaway: employees can only put in money via their paychecks, but employers can put in additional money directly. Both sources combined just have to obey the overall limits. Elaine benefits from both her contributions and her employer’s extra deposit, all helping her retirement fund grow.

These examples show that while you can’t break the rule of “no outside money directly into a 401(k),” there are strategies to maximize what can go in, and special cases like employer contributions or rollovers that add to your balance without hitting your take-home pay further.

Comparing 401(k) Contributions vs. Other Options (Pros & Cons)

How does contributing to a 401(k) via payroll stack up against other ways to save or invest? The following table highlights the pros and cons of a few scenarios: contributing to an employer’s 401(k), using a solo 401(k), contributing to an IRA, and investing in a regular taxable account.

As you can see, the 401(k) via payroll has major advantages for tax-deferred saving and high limits, but the trade-off is you’re locked into using compensation from a job to fuel it. Alternatives like IRAs and taxable accounts can complement your 401(k) by giving you more places to put extra money when you can’t contribute any more to a 401(k) or don’t have one available.

IRS Regulations and Legal Rulings on 401(k) Contributions

A number of IRS rules and even court cases have shaped the do’s and don’ts of 401(k) contributions. Here are some key regulations and legal points that impact how you can contribute:

• Internal Revenue Code §401(k): This is the foundational law that allows 401(k) plans. It essentially says an employee can choose to receive compensation as cash or have it deferred into a retirement plan. The requirement of making an election to defer before receiving the cash is rooted in this code section. In plain terms, the law set it up so you decide on diverting part of your salary to the 401(k) instead of taking it home, which is why after-the-fact contributions aren’t allowed.
• Advance Election Rule: IRS regulations require that your decision to contribute be made in advance of earning the income. For example, you typically enroll in your 401(k) and set a contribution percentage before those paychecks arrive.
• If you tried to take a paycheck and then contribute it later, it wouldn’t meet this “election in advance” requirement. There’s usually an enrollment period when you start a job or open season when you can change contributions, but once a paycheck is in your pocket, you can’t retroactively elect to put it in the 401(k).
• IRC §402(g) – Annual Deferral Limit: This is the section that imposes the annual dollar cap on your contributions ($22,500 for 2023, etc.). If you accidentally contribute over this limit (perhaps by having two jobs each allow you to max out not knowing about each other), the IRS doesn’t let you keep the excess in the plan.
• You’re required to get an “excess deferral” refunded to you (and you’ll owe taxes on it). This rule ensures no matter how many jobs or paychecks you have, your combined elective contributions don’t go over the line. It indirectly ties into the payroll concept because it’s monitoring what’s coming out of payroll across all sources.
• IRC §415 – 100% of Compensation Limit: The law also says you can’t contribute more than you earned. Even if the dollar limits are high, you’re capped at 100% of your compensation for contributions. For instance, if you only made $10,000 this year, that’s the absolute max that could possibly go into your 401(k) (you obviously can’t defer more than your paycheck, and your employer can’t contribute more than what you earned either).
• This comes from Code §415, which sets overall limits for retirement plans. It stops scenarios like trying to deposit outside money that exceeds what you actually got paid.
• Department of Labor Timing Regulations: The Dept. of Labor (which oversees parts of 401(k) plan administration under ERISA) has rules about how quickly employers must deposit the money they withhold from your paycheck into your 401(k).
• For small companies, the DOL provides a safe harbor that employee contributions must be in the plan within 7 business days of being withheld. For larger companies, the rule is that contributions should be deposited as soon as reasonably possible, which often is just a few days.
• Employers who hold onto the money too long (say, weeks or months) can get into legal trouble because that money legally belongs to the plan (and to you) once taken from your check. There have been cases where companies were penalized or sued for using employees’ 401(k) deductions as a float for their cash flow. Bottom line: once it’s out of your paycheck, it should promptly be in your 401(k) account.
• Court Case – S-Corp Owner Contributions: Courts have backed the IRS in cases involving S-corporation owners and 401(k)s. In one Tax Court case, an S-corp owner tried to make a 401(k) contribution based on funds they took out of the company as shareholder distributions (not as salary).
• The court disallowed the contribution, agreeing with the IRS that because the individual hadn’t paid themselves actual compensation in the form of wages, they had no eligible income to defer. The contribution violated the “must come from compensation” rule and had to be removed. This serves as a warning to business owners: no matter how your business profits look, you can’t fund a 401(k) without first running that money through payroll as wages.
• Plan Errors and Corrections: If a mistake is made – say your employer mistakenly doesn’t deduct your 401(k) election for a paycheck, or deducts the wrong amount – there are IRS and DOL-sanctioned correction methods.
• Often, the employer might have to make a contribution to make you whole. For example, if you elected 10% but it wasn’t taken out for three months due to an error, your employer might need to deposit the missed contributions on your behalf (and possibly some earnings). There have been situations where employees noticed such errors and the companies had to fix them when brought to light. The larger point is that 401(k) plans are strictly regulated, and keeping contributions in line with what was elected (and allowed by law) is taken seriously. Employers can even file under IRS correction programs to remedy any missteps in administering contributions.

All these regulations and cases reinforce one theme: 401(k) contributions are only supposed to happen in a certain way (via compensation deferral), and the system has numerous checks to enforce that. If something goes awry, there are processes to correct it, but it’s best to get it right the first time by following the rules.

⚠️ Common 401(k) Contribution Mistakes to Avoid

Given the rules we’ve covered, it’s not surprising that people can get tripped up by 401(k) contribution restrictions. Here are some common mistakes and misconceptions – and how to avoid them:

• Trying to deposit outside money into a 401(k): It’s worth repeating – you can’t take money sitting in your savings account and dump it into your 401(k). Some people realize this only after, say, getting a bonus or inheritance and wanting to invest it in their 401(k). The plan will reject outside contributions.
• Avoid this by planning ahead: if you know you’ll have extra funds you’d like to shelter, increase your payroll contribution rate and use those extra funds to live on meanwhile. Otherwise, consider an IRA or taxable investments for that money.
• Assuming self-employed means you can’t have a 401(k): A lot of freelancers or new business owners don’t realize they can open their own 401(k). They might leave corporate jobs and think “I no longer have a 401(k) because I don’t get a paycheck.”
• The mistake here is not taking advantage of a solo 401(k) or similar plan. Avoid this by researching retirement plan options if you’re self-employed. Solo 401(k)s, SEP IRAs, and SIMPLE IRAs are all designed for people without traditional payroll. Not using them is a missed opportunity for huge tax-advantaged savings.
• Over-contributing when you have multiple 401(k)s: If you change jobs mid-year or work two jobs with 401(k)s, it’s on you to ensure you don’t exceed the annual limit across all plans. A common error is maxing out at the first job (hitting $22,500) and then unknowingly also contributing at the second job. The IRS will eventually flag that you put in too much.
• Avoid this by monitoring your contributions. When starting a new job, you can adjust how much you contribute for the rest of the year based on what you already did at the old job. If you do accidentally go over, inform the plan administrators as soon as possible so the excess can be withdrawn – it’s better to correct it before tax filing to minimize penalties.
• S-Corp owners not taking a salary: We’ve touched on this, but it’s a big pitfall for entrepreneurs. If you have an S-corporation and only pay yourself through owner draws/distributions, you have no W-2 wages, and thus you can’t contribute to a 401(k) (and you also can’t have a “self-employed” 401(k) based on distributions – they don’t count). Some business owners don’t realize this until year-end.
• Avoid this by structuring some of your income as salary. Work with a tax advisor to determine a reasonable salary for yourself, run payroll, and then you can defer part of that into a 401(k). It might feel weird to “pay yourself,” but for retirement and tax planning it’s essential.
• Not capturing the full employer match: While this isn’t a rule violation, it’s a very common mistake with 401(k)s. If your employer offers matching contributions, always contribute at least enough to get the maximum match – otherwise you’re leaving free money on the table. For instance, if the match is 5% of pay, and you’re only contributing 3%, bump that up to 5% unless you absolutely can’t afford it. The match is part of your compensation (just in deferred form), and missing it is like refusing part of your paycheck.
• Waiting too long to adjust contributions: Some people realize in December that they have room to contribute more (or an upcoming bonus they’d like to shelter) and then find out it’s too late to make a change. Most plans allow you to change your contribution rate at least once or twice during the year (many allow anytime changes). But the key is, 401(k) contributions for a tax year generally can’t be made after the final paycheck of that year.
• Avoid this by looking at your contribution status by early fall. If you want to max out or if you got a raise and can afford more, adjust your payroll contributions then. Don’t wait until the year is over (when you can contribute to an IRA for the past year, but not a 401(k)).
• Ignoring plan limits on contributions per pay period: Some plans have a rule that you can only contribute up to a certain percentage of each paycheck (to ensure things like tax withholding and other deductions still happen). If you try to contribute 100% of a paycheck to cram in contributions, your plan may not allow it or you could accidentally skip necessary tax withholdings.
• And if you max out your 401(k) too early in the year, you might miss out on some employer matching contributions (since many companies match each paycheck). Avoid this by learning your plan’s rules and matching formula. It can be better to spread contributions out, or ensure your plan offers a “true-up” match at year-end if you front-load.

By staying aware of these potential missteps, you can make sure your 401(k) journey is smooth and optimized. When in doubt, ask your HR department or plan provider about the rules – it’s better to get clarification than accidentally break a rule and have to fix it later.

FAQs: Quick Answers to Common Questions

Can I contribute to my 401(k) from sources other than my paycheck?
No. Except for rollovers from other retirement accounts, new contributions to a 401(k) must come from your wages or self-employment earnings (via payroll deduction or business income).

Can I make a one-time lump-sum contribution to my 401(k)?
No. 401(k) plans won’t accept a one-time check or bank transfer from you. To contribute a lump sum, you’d need to arrange it through your payroll (for example, by contributing most or all of a particular paycheck).

Do solo 401(k) contributions require running payroll?
No. If you’re self-employed with no W-2 paycheck, you contribute to a solo 401(k) based on your business profits directly. (If you have an S-corp and pay yourself a salary, then yes, use that salary via payroll.)

Can I keep contributing to my 401(k) after I quit my job?
No. Once you leave an employer, you can’t contribute to that employer’s 401(k) plan anymore because you’re off their payroll. You can, however, roll over the 401(k) to an IRA or your new employer’s plan. Also, you generally cannot make contributions for a year after that year has ended – contributions for 2025, for example, have to be made by your last 2025 paycheck.

Are 401(k) contributions subject to state taxes?
Yes, in some states. Most states don’t tax 401(k) contributions (mirroring the federal treatment), but a few like Pennsylvania do tax your contributions in the year you make them.

Can my employer put money into my 401(k) outside of my contributions?
Yes. Employer matching or profit-sharing contributions are made directly by the company to your 401(k). These don’t come out of your paycheck – they’re extra, based on company policy and your plan’s rules.

If I have two 401(k)s, do I get double the contribution limit?
No. The annual elective deferral limit (e.g., $22,500) is per person, not per plan. You’ll need to split that limit across all your 401(k) plans. For example, you could do $10,000 in one and $12,500 in another, totaling $22,500.

Do 401(k) contributions avoid Social Security and Medicare taxes?
No. Traditional 401(k) contributions reduce your taxable income for federal (and usually state) income tax, but you still pay Social Security and Medicare (FICA) taxes on your full salary. Roth 401(k) contributions are made after-tax, so those also don’t save any FICA taxes.