Mike Piper, CPA
Today’s Q&A Series is a little different from most, because I’m the one asking the question. I’m also providing the answer, but only because it was handed to me on a silver platter. I like to think I know a lot about personal finance and investing, but one of the reasons I started this blog was to learn this stuff a little better myself, and I’m still learning all the time. The teacher in this case is one of my favorite financial bloggers, Mike Piper, who blogs at The Oblivious Investor. We were having an innocent little email conversation about deductions for bloggers when he noted one of his was his Solo 401K. I expressed regret that I’d already maxed out a 401K for 2012. That was when he dropped this little pearl of wisdom into my lap.
Q.
Is the $51K limit per person or per job?
A.
In 2013, the total of employee and employer contributions to retirement plans such as 401Ks, 403Bs, 457Bs, Solo 401Ks, SEP-IRAs, Profit-Sharing Plans, Keoghs etc is $51,000. (Add $5500 as a catch-up contribution for those over 50.) However, that limit is PER JOB, not per person. If you have two jobs with completely unrelated employers, you may be able to shelter much more than $51K, especially if you own one or both businesses. You are limited to $17,500 in employee contributions to all of your 401Ks, no matter how many jobs you work at, but the EMPLOYER contribution is unlimited up to $51,000 per job, with the caveat that you can only put in ~18% of your gross income into the plan.
The $51K limit is officially called the I.R.C. Section 415(c) limit (which is $40K, but Section 415(d) adjusts it for inflation which so far brings it to $51K). It is explained in plain language on the IRS website, with a very helpful example.
How This Affects Me
I am now an owner of two businesses, my partnership at work and this website. Now that I’m a partner, my entire 401K/Profit-Sharing Plan contribution can be an employer contribution. As long as I keep working full time, I should make enough to be able to max that out at $51K for 2013. I can open a Solo 401K to shelter blog income. Since I haven’t used any of my $17.5K employee contribution, I can completely shelter my first $17.5K in blog income into a Solo 401K. If the blog miraculously makes more than that this year, then I can shelter ~18% of the profit above and beyond $17.5K. At a 38% marginal rate, if this site generates my goal for the year ($12K profit), I can save myself $4560 in taxes. Alternatively, I could pay taxes on it now and put it into a Roth Solo 401K, and never pay taxes on it again.
Couldn’t Do It In 2012 Anyway
At first I was bummed that I didn’t learn this until January, since the deadline to set up a Solo 401K is December 31st of any given year. But then I realized it didn’t really matter for 2012. Since I’d already maxed out my employee contributions (remember I was an employee for most of 2012) there was no difference between what I could put into a Solo 401K and what I can put into a SEP-IRA. Either way, I can only put in ~18% of my profits. However, a SEP-IRA can be opened for 2012 until April 15, 2013, which gives me time to open the account and make my contribution. On $6749 of profit, I should be able to shelter ~ $1215, saving me ~$401 in federal and state taxes, and increasing my tax-sheltered (and creditor-sheltered) nest egg by $1215. I can either immediately convert the SEP-IRA to a Roth IRA or simply roll it into the Solo 401K (or even my old 401K- The TSP) I’ll open later in 2013 so I can preserve my ability to do backdoor Roths. Two great options.
How This Might Affect You
Do you have two jobs? Would you like to pay less in taxes? Would you like to put more toward retirement? This might be your chance. Set yourself up so you have one job as an employee or partner, and one job as an independent contractor. If you have sufficient income (and a decent plan at your first job), you may be able to get more than $51K into 401Ks. Consider a surgeon who may be a hospital employee at his main job. He contributes his $17.5K into the main job 401K, and receives the match, which could be as much as $33.5K. Let’s say he makes another $100K moonlighting as an independent contractor across town. He could put another $18K or so into a Solo 401K (or SEP-IRA) for a total of $69K. If he and his spouse also do backdoor Roths, that’s another $11K, for a total of $80K in tax-advantaged savings for 2013.
Through my primary job I have a 403b and a 417 plan. Each has the $17.5k limit and then there is another $10k in matching. I do outside consulting work also – about $20k. Can I use this extra income for a 401k and shelter the first $17.5k again? Or only the ~18% because 401 and 403 are the same? And do I need to set up a new corp and get consulting fees paid to that corp rather than my personal SS# ? It seems like the costs and extra accounting forms will add up. Thank you.
Can you further explain the “back door roth” strategy that you referenced?
Great blog – and glad you posted this particular topic. I had ‘lost’ the last one you had, addressing this. Sent this on to my accountant, and my kids – maybe the biggest move they can make in their own pursuit of a comfortable retirement. Thanks.
RP- You couldn’t do the $17.5K again in a Solo 401K. So you’d be limited to ~ 18% of your consulting income in the Solo 401K. You could also put it into a SEP-IRA and convert it to a Roth each year if you don’t want the slightly extra Solo 401K hassle. What’s a 417? I assume you mean 457? You don’t need a corporation to set up a Solo 401K. You could put in something like $4K a year, saving you something like $1500 on your taxes.
Mike- See this link: https://www.whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/
Gary- Glad you enjoy the blog.
WCI – seems like I might be an ‘opposite’ situation as you: at my current job,I have a 401k which I max out each year. My old job was an S-corporation where I was both an employee and a shareholder. Am no longer employed there but am still a shareholder. Can I setup a solo/self-directed 401k (or some other tax advantaged structure) that I could contribute to beyond the 17.5K cap on my current job’s 401k since I’m still a shareholder at my old job? The distributions I receive each year from the S-corp are very small (I own small number of shares, not a lot of profit historically)…say less then $400/yr typically. Any guidance appreciated, thanks!
Will two businesses you own really let you contribute more than $51k? Wouldn’t they fall into a controlled group?
Harry, as WCI mentioned above, you must have “two jobs with completely unrelated employers”.
Chupacaba, Sorry, that wouldn’t work. As WCI mentioned, the 401k limits are per employer (“job”) not per person. You would have to participate at a second plan with your prior employer to qualify.
Johanna-
I think Chupacabra is saying he has an old job and a new job. So the prior employer is an S Corp. The new employer is unrelated.
Harry brings up an important issue, what is the definition of related employers/controlled group. Here are the definitions from his link:
(1) Parent-subsidiary controlled group
One or more chains of corporations connected through stock ownership with a common parent corporation if—
That doesn’t apply to me as my blog is not connected to my physician partnership.
2) Brother-sister controlled group
Two or more corporations if 5 or fewer persons who are individuals, estates, or trusts own (within the meaning of subsection (d)(2)) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation.
The partnership is something like 75 partners owning an equal share. So this doesn’t apply either (ignoring the fact that neither of my business entities is a corporation.)
(3) Combined group
Three or more corporations each of which is a member of a group of corporations described in paragraph (1) or (2), and one of which—
(A) is a common parent corporation included in a group of corporations described in paragraph (1), and also
(B) is included in a group of corporations described in paragraph (2).
Again, doesn’t apply to me.
(4) Certain insurance companies
Two or more insurance companies subject to taxation under section 801 which are members of a controlled group of corporations described in paragraph (1), (2), or (3). Such insurance companies shall be treated as a controlled group of corporations separate from any other corporations which are members of the controlled group of corporations described in paragraph (1), (2), or (3).
Neither of my business entities are insurance companies.
Now, I don’t think a doctor can set up two S corps for himself and use one at one job and one at another and then contribute more than $51K into 401Ks, but if you have two unrelated businesses, I don’t see why you can’t. Am I missing something Harry?
And the 51k doesn’t include backdoor IRAs right?
So for those in the military, the TSP limits you to employee contributions only, capped out $17,500 outside combat zones. If a military physician also did some moonlighting and was set up as a LLC, S-corp, or sole proprietor they could shelter an additional 18% of the moonlighting income?
More if starting a defined benefit plan but this has more costs.
Exactly. I had a SEP-IRA when I was in the military and converted it all to Roth the year I got out. But if I were to do it over again I’d do a Solo Roth 401K, and I’d do the Roth TSP, and backdoor Roths. Actually, I don’t even think I had to do Roths through the backdoor while I was in the military.
“If you have two jobs with completely unrelated employers, you may be able to shelter much more than $51K, especially if you own one or both businesses.” If a doctor practices on his own (not with 75 other partners), and the same doctor writes an unrelated blog, are these two businesses completely unrelated or aggregated as a controlled group? I don’t know the answer. Just asking.
That’s a good question. I’m also not sure.
Great post and discussion! I found this site recently and have enjoyed reading it.
My pretax retirement contributions are already maxed out in a profit sharing plan as a partner in a group practice–my main job. Can I form a solo 401k and contribute to it from a couple of LLC’s I own consisting of cash flowing rental properties?
Contributions to retirement accounts need to be from earned income. Your rental properties don’t qualify, sorry. You didn’t mention backdoor roth IRAs. I hope you’re doing those too.
Hi,
First off, thank you. I’m a recent residency grad (1.5 years out) and your blog has helped me focus on and better define my retirement and overall financial goals.
My question is as follows: I’m an independent contractor EM physician. I work two unrelated jobs as an IC (in two different states). I have a SEP-IRA and backdoor Roth IRA that I max out each year. Are you saying it is possible to create another retirement account (either another SEP or an individual/solo 401(k)) and put up to 18% of what I make at one of the two jobs into that account (in addition to maxing out the first SEP)? Thanks for clarifying.
Parag
I would say that isn’t allowed because there aren’t two employers. It’s just you.
Thanks for the clarification. Dang passive income! I am a couple of years out of residency and still firguring these things out. I just started reading up on the backdoor roth IRA and plan to max out for my wife and I soon…it sound like I can still contribute for 2012 if I do it before tax day.
BTW – I would be interested to see a post on your thoughts/experience with realestate investment properties and a breakdown of associated tax advantages if you feel so inclined. I think you mentioned somewhere in the blog that you had an llc for a rental property?
There’s a great guest post coming up by another doc on real estate investing. You might like this too:
https://www.whitecoatinvestor.com/how-to-make-money-investing-in-real-estate/
I was told by CPA that the max contribution is 51k from profit sharing and back door roth. I didnt know about the separate job issue. Is this the case? Or have I been mis-informed
I’m sorry your CPA seems to have mis-informed you. To be fair, this issue doesn’t apply to very many people. The backdoor Roth IRA is above and beyond the $51K limit. So is a separate job’s retirement plan.
This is a pretty big bombshell to me, and a lot of ER docs.
A lot of us have a normal job, for which we do the typical 403b/401k up to $51k.
On top of that, in my case, in 2012 I earned about $30k via 1099 income as an independent contractor moonlight at another unrelated ER.
Which means if I set up a new 401, I could shelter another $5k or so of income.
Not a bad idea!
In fact, I probably should do this. As you point out, it is not too late to open at SEP-IRA for 2012, and if I fund it with $5k that’ll reduce my ridiculously high tax bill!
Yup. Me too. Thus the post.
If I do not “fill” the employee part of a plan (say only 10k instead of 17.5k), can I add the remainder into my different solo401k along with the 20% employer contribution?
Yes, you can do that.
I am a W-2 employee from two different groups. In my main group, I am able to put $51k into retirement savings, $17k is from individual contribution. In the second group, their 401k plan only allows for individual 401k contributions–no profit share, Safe harbor, match, etc. Since I already max out my individual $17k contribution at my main group is there a way I can contribute more $$ to a solo-401k (or SEP IRA) based on my income from the second group (both are corps, I have ownership in the main group, but do not and will not have ownership in the second group. I know I could if I were to switch to a 1099 employee at the second group, but if I stay as a W-2 can I contribute to a solo 401k if they do not have a profit share, etc that I can participate in?
No, if you’re an employee you can’t do a solo 401K. You have to be self-employed. Are you sure you max out your individual contribution at the first job? Can all that $51K be “profit-sharing?”
Unfortunately, we limit the amount of profit share (51k-17k=34k) we pay out in order to minimize the amount we need to pay out to the regular employees as part of the profit share plan. We are set up as a corporation with 60+ employees. Any other ideas?
There’s always index funds in a taxable account. It’s not nearly as bad an option as people often assume. Very tax efficient.