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SEP, Regular 401K, and Solo 401K

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  • SEP, Regular 401K, and Solo 401K

    I have a side gig that brings in money to our household and also pay my wife for clerical stuff. I contribute the max I could put in for SEP (based on the IRS regulations) and will help start an SEP for my wife this year, too.

    I also have a full-time job where I contribute the max amount every year to the 401K. My wife also has a full-time job where she contributes the 2019 max to her 401K.

    My friend told me that me and my wife could also open and contribute to Solo 401K but I'm not sure if it's legally allowed to contribute to both work 401K and solo 401K at the same time.

    Any thoughts are greatly appreciated. Thanks.

  • #2
    There is one employee elective contribution limit (2019 = $19K) across all 401k, 403b, SARSEP and SIMPLE IRA plans. If your have maximized at your primary employer's 401K plan, you can not make employee elective contributions to a one-participant 401k plan.

    There is a separate employee + employer annual addition limit (2019 = $56K) for each unaffiliated employer. As long as you or your wife do not have an ownership interest in either of your employers. You have a separate limit. If you do have an ownership interest, you "could" be part of an unaffiliated service group and ineligible for either a SEP IRA or a one-participant 401k.

    You can adopt, maintain and contribute to a one-participant 401k or SEP IRA. However, you can not contribute to a 5305-SEP IRA for the same year you maintain a one-participant 401k.

    If you are maximizing your employee elective contribution at your primary employer. You can only make employer contributions to a one-participant 401k. The employer contributions to a SEP IRA and a one-participant 401k are exactly the same.

    However, SEP IRA balances interfere with a Backdoor Roth.


    • #3

      Your wife could open a Solo 401k Plan and she could contribute the maximum deferral amount of $19,000 or $25,000 per calendar year.  In addition she could also receive a employer contribution not to exceed 25% of total compensation for the company.

      You would be limited to $19,000 per year across all plans in regards to your 401k deferrals.

      What you could look at doing though is allowing after tax contributions to your wife's solo 401k which could allow you and her to defer after tax dollars up to a total from all sources up to $56,000 not to exceed 100% of income.

      For example lets say that you also have compensation from your wife's company of $20,000 you could make an after tax contribution of $20,000 and then convert the amount inside the plan to a Roth.  Thus the Super Roth. Your wife could also do the same. You cannot exceed to the two limits though.



      • #4
        No question, the ability to defer taxes or by contributing to a retirement plan and open a mega BD Roth is valuable, but this is not by default the optimal choice. You need to consider other factors that will impact your costs and tax filing.

        From your original post, it appears your wife is employed in addition to being paid by your side hustle for clerical work. If so, and if she is below the cutoff for SS withholding, you should carefully consider the cost-benefit of contributing to a SEP for her. Assuming you are exceeding the SS threshold of $132,900 (2019), then you would be trading income taxed for FICA purposes at 2.9% for Medicare only v. income taxed for FICA purposes at 15.3% for SS in addition to Medicare. (If she's not otherwise employed, this is a definite consideration.)

        In addition, if your side hustle is set up as a sole proprietor or LLC v. S-corp (which I recommend unless you're pulling in ~$400k+), then you'll have to either start payroll services or operate your business as a spousal JV (Joint Venture). Not that much trouble, but does require more administrative work dividing expenses at tax time, an agreement, etc.

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