Do 401k Contributions Have to Come From Payroll?

A 401(k) contribution represents funds set aside in an employer-sponsored retirement savings plan. These plans are a common way for individuals to build a nest egg for their future. The process of funding these accounts often raises a question for participants: is the money deposited into their 401(k) exclusively drawn from their regular pay?

Employee Contributions via Payroll Deduction

For most individuals employed by a company offering a 401(k) plan, their personal contributions are made through payroll deductions. This method is integral to the plan’s tax-advantaged status. When an employee elects to contribute, they designate a percentage or a specific dollar amount of their gross pay to be deferred into their retirement account. The employer then withholds this amount from each paycheck and deposits it directly into the employee’s 401(k).

For 2025, an employee can contribute up to $23,500. Individuals aged 50 and over are permitted to make additional catch-up contributions. This amount is $7,500, but a special, higher limit of $11,250 applies to those aged 60, 61, 62, and 63.

The mechanism of payroll deduction is directly tied to the tax treatment of the contributions. For traditional, pre-tax 401(k) contributions, the money is deferred before income taxes are calculated. This reduces the employee’s taxable income for the year, which is reflected in Box 1 of their Form W-2.

Alternatively, if an employee chooses to make Roth 401(k) contributions, the funds are deferred after income taxes have been paid. While this does not lower their current taxable income, qualified withdrawals in retirement are tax-free. The payroll system manages this distinction by taxing the employee’s gross pay first and then directing the post-tax amount to the Roth 401(k).

Employer Contribution Sources

Beyond what an employee chooses to save, funds can also enter a 401(k) directly from the employer. These contributions are separate from an employee’s wages and are not deducted from their paycheck. Instead, this money comes from the company’s own business assets as a way to enhance employee benefits.

There are two primary forms of employer contributions: matching and non-elective contributions, often called profit sharing. A matching contribution is directly linked to an employee’s own savings rate. A common formula might involve the employer contributing 50 cents for every dollar the employee saves, up to a certain percentage of the employee’s salary. Profit-sharing contributions are not contingent on employee participation and are discretionary, allowing the employer to contribute to all eligible employees’ accounts.

Contributions for the Self-Employed

The funding structure changes for self-employed individuals, who do not receive a traditional paycheck. For freelancers, independent contractors, and small business owners, a Solo 401(k), also known as an Individual 401(k), allows them to save for retirement. All contributions are made directly from the net earnings of the business, not a payroll system.

A feature of the Solo 401(k) is that the owner can contribute in two different capacities: as the “employee” and as the “employer.” As the employee, the individual can make elective deferrals up to the annual limit set by the IRS. As the employer, they can make an additional profit-sharing contribution, calculated as a percentage of their net adjusted self-employment income.

The funds for both types of contributions are drawn from the business’s bank account. The sum of both employee and employer contributions cannot exceed the overall limit of $70,000 for 2025.

Rollover Contributions

Another source of funds for a 401(k) that operates outside of payroll is a rollover. A rollover is the process of moving existing retirement savings from one qualified account to another, such as from a former employer’s 401(k) or an Individual Retirement Account (IRA). This action is a transfer of assets, not a new contribution.

When an individual initiates a rollover, the funds are moved either through a direct rollover, where the financial institution sends the money directly to the new plan, or an indirect rollover, where the individual receives a check and has 60 days to deposit it. Because these funds are sourced from a pre-existing retirement plan, they are not connected to current payroll processing. The purpose is to consolidate retirement assets or move them to a plan with different investment options.

This process does not count toward the annual contribution limits that apply to employee and employer contributions. While most new contributions from an employee’s income must pass through payroll, large sums can enter a 401(k) through rollovers.