By Dr. James M. Dahle, WCI Founder
I first wrote about multiple 401(k) accounts back in 2013 in a post entitled Beating the $51K Limit (for which I am still eternally grateful to Mike Piper for the pearl that grew into that post). Well, the $51K limit has since grown into the $66K limit in 2023 thanks to inflation, but all the same principles still apply.
I get tons of questions on multiple employer 401(k)s in our Forum, Podcast, Facebook, and Reddit groups, in the comments sections of the posts on this site, and by email. Heck, this post already has over 1,000 comments! Mostly, I wrote this post so I could copy and paste its URL instead of typing the same old stuff over and over again. (Come to think of it, that was the motivation for starting this site in the first place.)
Can You Have Multiple 401(k)s?
Here's the deal. Many physicians work for multiple employers or work as an employee and either an independent contractor or a consultant. Many others have a side job of another type. Their incomes are far higher than they require for their current spending needs, but they're behind on their savings or otherwise have a desire to maximize the amount of money they can put into retirement accounts, especially tax-deferred retirement accounts.
Obviously, these types of accounts minimize tax, maximize returns, increase asset protection, and facilitate estate planning. Who wouldn't want to get more money into them? However, most of these doctors are surprised to learn that they can have more than one 401(k). That's right,
YOU CAN HAVE MORE THAN ONE 401(K)!
Okay, now that I've got that out of my system, let's make a list of the 7 governing rules for using more than one 401(k):
What to Do with Multiple 401(k) Accounts – Multiple 401(k) Rules
Rule #1 – One Employee Contribution Total
In 2023 the IRS only allows you to make a total of $22,500 ($30,000 if 50 or over) worth of “employee contributions” to all of your 401(k)s (or 403(b)s) no matter how many unrelated employers you have. If you have access to two 401(k)s, you can split this up, but the total must be $22.5K ($30K if over 50) or less.
Rule #2 – $66K per Unrelated Employer
The IRS also only allows you and your employer (which might also be you) to put a total of $66,000 for 2023 ($73,500 if 50+) per year into a 401(k). This includes the employee contribution, any match from the employer, and any employer contributions. This is the same limit for a SEP-IRA (if <50) which is technically all employer contributions. However, unlike rule # 1, this limit applies to each unrelated employer separately.
“Unrelated employers” means that the businesses doing the employing are not a “controlled group.” There are two types of controlled groups:
- “Parent-Subsidiary” Group
This is when a parent business (corporation, sole proprietor, LLC, partnership, etc.) owns 80%+ of another business. - “Brother-Sister” Group
This is where 5 or fewer individuals, estates, or trusts own a controlling interest (again, 80%+) of two different businesses.
So if the two businesses you are involved in aren't a controlled group, and they each have a 401(k), (or a 401(k) and a SEP-IRA) you get two $57K limits. Pretty cool, huh? There are several common examples where this could apply to a physician:
Multiple 401(k) – Example #1
A 40-year-old single physician is an employee of two completely unrelated hospitals. The first pays her $200K per year and matches 100% of her first $5K put into the 401(k). It also offers her a 457. The second pays her $100K per year and matches 50% of the first $7K she puts into her 401(k). What retirement accounts should this physician use in order to maximize her contributions in 2020?
- Hospital 1 401(k): At least $5K (plus the $5K match) = $10K
- Hospital 1 457: $22.5K
- Hospital 2 401(k): At least $7K (plus the $3,500 match) = $10,500
- Plus another $10.5K into either hospital's 401(k) (pick the one with the better investments)
- Plus $6,500 into a Backdoor Roth IRA
- Total: $60,000
Multiple 401(k) – Example #2
A 40-year-old married physician whose spouse doesn't work is a partner in a 100 doctor partnership which offers a 401(k)/Profit-sharing plan in which he can “self-match” up to the $57K limit. The partnership also offers a defined benefit/cash balance plan with a $30K limit. He makes $300K practicing medicine. He is also the sole owner of a website on the side that makes $300K per year and has its own individual 401(k). Both 401(k)s offer a Roth option. What is the maximum amount he can put into Roth accounts in any given year without doing a conversion of tax-deferred or after-tax dollars?
- Partnership 401(k)/PSP: $66K, of which $22.5K can be Roth*
- Partnership DB/CBP: $30K, of which $0K can be Roth
- Website Individual 401(k): $66K, of which $22.5K could be Roth* if none of the Partnership 401(k) money represents an “employee contribution”. Otherwise, $0K Roth.
- Personal Backdoor Roth IRA: $6,500
- Spousal Backdoor Roth IRA: $6,500
- HSA: $7,750
- Total: $182,750 of which $36K can be Roth*
*Note that Secure Act 2.0 has made some changes which will allow the possibility of Roth matching contributions starting in 2023.
Multiple 401(k) – Example #3
This 52-year-old married physician (spouse doesn't work) is an employee of a hospital where she is paid $200K. She has a 401(k) with a set $20K employer profit-sharing contribution (not a match) and the hospital pays most of the premiums on a non-high-deductible health plan. She moonlights across town as an independent contractor and is paid on a 1099, where she earns $100K and has opened up an individual 401(k). The hospital 401(k) has terrible investments and high fees. How should she allocate her retirement savings in order to best use these options?
- Hospital 401(k): $20K employer contribution
- Individual 401(k): $30K employee contribution (50+) + 20% * $100K = $20K employer contribution = $50K (technically slightly less due to Rule # 5 below)
- Personal Backdoor Roth IRA: $7,500 (50+)
- Spousal Backdoor Roth IRA: $7,500 (50+)
- Total: $85K
Multiple 401(k) – Example #4
A 40-year-old single physician is in a business partnership with one other physician and they have several employees. Due to hassles and the costs of their employees, they have opted to use a SIMPLE 401(k) for their practice. He makes $200K. He also does some consulting work on his own as a sole proprietorship where he is paid on a 1099, about $50K per year. He and his physician business partner recently opened up another business where they sell a medical device. They are the only owners of both the practice and of the corporation that sells the device (which has no employees). He makes another $50K from this company of which $25K is salary and $25K is a “distribution” from the S Corp. What kind of retirement set-up should this physician do?
- Practice SIMPLE IRA: $15,500 employee contribution plus $6K (3% of salary) employer contribution: $21,500
- Unfortunately, these three entities are part of a “controlled group”, so he cannot have a separate retirement plan for either of the other two entities that ignore the employees in the practice. The presence of a SIMPLE IRA also makes it tough to use a Backdoor Roth IRA due to the pro-rata rule.
- Total: $21,500
Rule #3 – Employer Contributions Are 20% of “Net Earnings from Self-Employment”
When calculating the employer contribution for a SEP-IRA or an Individual 401(k), you use your “net earnings from self-employment”. This includes any amount used for an employee contribution, but excludes the amount used for S Corp distributions (those aren't “earned income” and so can't be used for retirement account contributions) and the amount used for the employer half of the payroll taxes (same as the self-employment tax deduction).
The employer contribution in an individual 401(k) and a SEP-IRA is exactly the same (for those under 50), but since you can also make an employee contribution into an individual 401(k) (and 401(k) money isn't included in the backdoor Roth pro-rata calculation), a 401(k) is generally the better option for the self-employed, even if it is slightly more complicated to open (and must be opened in the calendar year rather than before tax day of the next year). The possibility of a Roth SEP IRA starting in 2023 could provide another way around this rule.
Note that an employee owner of an S Corp is limited to 25% of W-2 compensation as an employer contribution.
Rule #4 – You Only Get One SEP, SIMPLE, or 401(k) per Unrelated Employer per Year
Each unrelated employer should only have one of these three types of accounts for each tax year. You can technically have more than one, but they share a combined limit. However, you could open a SEP-IRA for your self-employment income in March 2023 for tax year 2022, and then open an individual 401(k) in June 2023 for tax year 2023 if you like. Remember that just because you are the sole owner of two separate businesses doesn't mean you get two different retirement accounts. Those businesses are a controlled group.
Rule #5 – These Rules Have Nothing to Do with 457s, IRAs, or HSAs
457(b)s, Backdoor Roth IRAs, and HSAs all have their own separate limits that have nothing to do with the limits for 401(k)s, 403(b)s, SEP-IRAs, and SIMPLE IRAs. Putting more into a Roth IRA doesn't mean you can't still max out your 401(k).
Rule #6 – Catch-Up Contributions Also Allow You to Beat the $66K Limit
Many accounts have catch-up contributions if you're old enough (usually 50 or older, but 55 or older for HSAs). Roth IRAs have a $1,000 catch-up, HSAs have a $1,000 catch-up, and 401(k)/403(b)s have a $7,500 catch up. That $7,500 catch-up is in addition to the $66K limit, so if you're over 50, you're self-employed with lots of income, and you make your full $30,000 employee contribution to your individual 401(k), the $66K limit becomes a $73,500K limit. Note that 457(b) catch-ups and 403(b) catch-ups work slightly differently.
If 401(k)s are so great, why just stop at one?
Rule #7 – 403(b)s Are Not 401(k)s
Many physicians have access to a 403(b) by working for a hospital or public entity. There is a unique rule for 403(b)s, however, which will prevent many doctors who use a 403(b) at their main job from maxing out an individual 401(k) on the side, at least if they own 50% or more of the company for which they have an individual 401(k) (and they probably do). It doesn't make much sense, but neither do many tax and retirement plan rules out there. Basically, your 403(b) at work, unlike a 401(k), is considered to be controlled by you. So you are stuck with the same 415c limit of $57K (see Chapter 3 at the link). So if you put $22.5K into your 403(b) at work, you are only allowed to put $66K-$22.5K=$43.5K into an individual 401(k).
My Accountant Doesn't Believe You
Obviously, having access to multiple 401(k)s is an unusual situation among Americans in general, even if it is quite common among doctors. As such, an unbelievable number of accountants (and especially their clients) have a misunderstanding of the rules noted above, particularly the one about having a separate $66K limit for each unrelated employer. However, taking a look at this article on IRS.Gov written in layman's language, you can see this is true:
Overall Limit on Contributions
Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:
- elective deferrals
- employer matching contributions
- employer nonelective contributions
- allocations of forfeitures
The annual additions paid to a participant’s account cannot exceed the lesser of
- 100% of the participant's compensation, or
There are separate, smaller limits for SIMPLE 401(k) plans.
If that's not enough for your accountant, you can simply go straight to the actual code sections in question, in this case, 415(c) (where the $66K limit comes from, originally $40K). Be sure to scroll through subsections (f) through (h) where the relevant examples are used:
(f) Combining of plans
(1) In general
For purposes of applying the limitations of subsections (b) and (c)—(A) all defined benefit plans (whether or not terminated) of an employer are to be treated as one defined benefit plan, and(B) all defined contribution plans (whether or not terminated) of an employer are to be treated as one defined contribution plan.
Note how it says all defined contribution plans OF AN EMPLOYER are to be treated as one plan. Section (g) reads similarly:
(g) Aggregation of plans
… the Secretary, in applying the provisions of this section to benefits or contributions under more than one plan maintained by the same employer, ….with respect to which the participant has the control required under section 414 (b) or (c)…shall…disqualify one or more…plans…until such benefits or contributions do not exceed the limitations contained in this section.
I was pretty pumped when I realized I could do this. Here’s my set up
Employer 1 – public hospital
-governmental 457 – I plan on maxing this out
-pension plan
Employer 2 – public university (unrelated to employer 1)
-403b – I plan on maxing this out
-governmental 457 – not contributing to this
-pension plan
Employer 3 – self
-individual 401k – I plan on maxing out the employer contribution
Between these three employers, I max out a 403b, a 457, and the employer contribution of my individual 401k. I also accrue time concurrently in two pension systems with a reciprocal agreement. And hopefully I also make enough, for long enough, in Social Security-eligible employment (e.g., my self-employment) to beat the windfall elimination provision too.
Can you say what each of your jobs are?
@NP – attend at employer 1, non-medical faculty position at employer 2, and consult on a self-employed basis.
@WCI – thanks for pointing out the detail about 403b’s and individual 401k’s (again). Had missed it, though in my case my self-employed income is not so significant that I would come close to that limit (yet).
See rule # 7 above about your 403b.
I’m in a potentially similar situation as LG. Currently I have working for a government agency:
403b=$18,000 Roth
457 governmental= $18,000 Roth
Backdoor Roth=$5,500
Defined Benefit Plan=Contributing 11% of salary
I may take up a second job to increase the amount of tax sheltered savings–leading to these potential options.
1. Working as an employee at my sister’s private practice in order to contribute $15,000 in a 401k she had set up for her employees.
2. Getting a 1099 at my sister’s private practice or with any other locums agency to contribute $10,000 in a SEP IRA or Solo 401k. If I choose SEP IRA, I would convert it to Roth every year. I estimate making only $50,000 at a second job, which limits the amount I can contribute. This might make working as an employee at my sister’s office a better option for maximizing the amount of money in a tax shelter.
What do you think?
You can’t make employee contributions to the 403(b) and a separate 401(k).
You could do a solo 401(k) if you are an IC to your sister. You would be limited to ~20% of your income there up $53K-$18K (see the 403(b) rule in the article.) So if you made $50K from her, you could put ~$10K into a solo 401(k). You could put the same into a SEP-IRA, but unless you converted it or rolled it into another 401(k) each year, that would screw up your backdoor Roth IRA.
I’d definitely go the 1099/IC route if your goal is more money in a retirement account.
Thank you very much for this article. I am a W2 employee and have 401k and 457 for my employer but I made some 1099 income in 2020.
My questions?
1. can I contribute 20 percent profit from 1099 income to solo 401 k or do I need to open Sep IRA ( did back foot Roth as well).
2. I already have a solo 401k account which was opened in 2018. Can I put in that 20 % to same account or do I need to open a new one?
3. Also I have some K1 income from surgery center? Can I also contribute 20%. of this in solo 401 k?
Thanks again
Himanshu
1. Yes. But keep in mind it’s too late to open one for 2020. You’d have to do a SEP IRA for 2020, then open a solo 401(k) for 2021. Since there was no money in the SEP IRA on 12/31, you won’t get pro-rated for 2020. If you get it into the solo 401k by the end of this year, you won’t get pro-rated for 2021.
2. Yes, that would be fine assuming it is for your current business.
3. No. If it is earned income, that partnership could start a 401(k), but you can’t just open a random solo 401(k) for partnership income. Remember not all K-1 income is earned income.
Your website has likely saved me tens of thousands of dollars over my career. The Mega backdoor Roth and multiple 401k’s are two of the areas I had never heard of before reading your site.
My current setup
Employed urologist
Hospital job-
403b with 100% match up to 6% of salary on IRS limit of $265000- so $15900 per year
non governmental 457b. The hospital also has a non-qualified plan that matches up to $7500 of contributions into this account and places these funds into 401a account. They will be lost if I leave so tax deferred for now. At three years these funds vest, so they become taxable and are distributed to me.
After tax contributions into 403b- limited by the HCE testing to 5% or 13250 per year. then converted in-service to Roth IRA annually via the Mega Backdoor (plan does place restriction on further contributions for six months after distribution).
I also treat stones with shockwave lithotripsy as a side job, paid on 1099. I have a Vanguard Solo 401k that I use to stash the remaining $2100 of employee contributions then my 20% of net profits.
This year I began buying into the lithotripter, so I have K1 income as well for the employer contributions to the solo 401k.
And of course, Back door roth accounts for my wife and for me.
My wife is a nurse at a separate hospital where she has access to their 403b. She only works 1 or 2 days a month but all of her salary goes into her 403b. Something like $12000 per year.
All told, we are able to put something like $95000 per year into various retirement accounts. I am two years out of training so still trying to pay off student loans prior to doing any taxable accounts.
You know you can do “employer contributions” from that 1099 income and don’t need the K1 income to do that, right?
Also be aware of the update to this post, rule # 7, about 403bs.
In theory, yes.
In practice, as an employed physician I get my med mal coverage through my employer. Rather than purchase a separate policy to cover lithotripsy only, my employer will cover those services, but I have to sign over the checks. The checks are subsequently paid back out at full face value as W2 income with taxes withheld. At the end of the year, my accountant simply creates a record of these signed over checks as a deduction for my sole proprietorship.
This has the effect of converting about 85% of my 1099 income to W2 income (the remaining 1099 income is not for direct patient care and is not subject to the signing over). This obviously has a negative effect on my ability to save in a solo 401k, but I have run the numbers both ways (purchasing a separate malpractice policy versus turning over the checks), and the amount lost in retirement savings is more than made up for in the amount saved in malpractice premiums. It is not ideal, and I complain about the situation more than my colleagues, but I am happy with the arrangement overall. This is why the K1 income is important to me, as it is not subject to these restrictions.
Amazing how complicated this can get, isn’t it?
Amen!
True that re: accountant not believing you. I had to have the owner of the company administrating my solo 401K call the accountant to explain the law.
Part time day job – private practice – 208k – just enough to reach my 52k max by employer contribution using a semi-outdated type of plan – the money purchase pension plan. We have switched to a profit sharing 401k for 2015.
Side practice – 50k of 1099 income, solo 401k – $27,293 contribution.
Added benefit of my solo 401k is that it accepts rollover deductable contributions, which enabled me to back door roth the non-deductable $ left over in my IRA
Back door Roth -5.5k
Total $85,793.
I had thought about looking for a more full time gig with one group, rather than trying to manage two different schedules, however, it works out better from a retirement savings standpoint to have the two different jobs. Since my main practice is switching to a 401k profit sharing plan, I will have to be mindful of the individual 401k limit, which shouldn’t be an issue as long as I maintain an income of >212k.
$208K seems a little low to max out a $52K retirement account solely based on employer contributions. Be careful you’re not making a maximum employee contribution to both 401(k)s. Remember you only get one of those.
Regarding 208K not being enough to max out at 52K contribution – the rules of our money purchase pension plan are that the company must contribute 25% of our income from the company profits, so the 208K is just enough – in fact I had to defer some expenses to be paid out of 2015 funds in order to meet that number to max that account. Moving forward, since both plans will be 401(k) type, I understand that I have an individual 401(k) component limit. If I can show income of greater than 212 K in my main practice, the company profit sharing contribution will max that account and I will not have to use the 401K component of the profit sharing plan, and can use all the 401(k) contibution in my side job. I may have to play with expenses next year in order to maximize contributions from both accounts. I know it is a somewhat unique situation because in my main job we have only four equal partners, which allows us to use the profit-sharing component differently than other types of groups that may have employees or lower income workers.
Got it.
What awesome timing for me for this post, and I have a question of what my maximum contribution options are. Here is my situation:
I am single and about to be employed by a Megacorp that will pay me a stipend as employee (W2) of $178K per year including some health benefits with HSA capability as well as a 401K.
I will also be an independent contractor doing work for the same company. They will be paying my LLC (1099) which in turn will pay me $350K (W2).
Does this mean that I can have the Megacorp put in 25% into a 401K ($178K * 25% = $44,500)
and also I will be able to maximize my $401K through the LLC of $53K
plus an HSA $3400
plus a back door roth $5500
total $106400
Is my math accurate?
The math looks fine, but keep in mind you can only put as much into the employer’s 401(k) as the employer will let you. They may not let you put $44.5K in there even if the law allows it. There is also the HCE issue with the megacorp which may limit you. Go talk to HR about it.
WCI is right – depending on the plan design, they may limit the contributions made by HCEs to something like 10% or 12%. That’s a big bummer for most HCEs. Maybe with a match and/or profit sharing (if they have any) the contribution can be larger, but your salary deferral % limit is usually spelled out when you go to the portal to make your salary deduction election.
Awesome article! Hopefully someone could help clarify my situation. I work full time and made $300k last year where I maxed out the 52k contribution. I also own rental property in an LLC in which I collected about $30k in rents. Could I contribute the $30k from the rents to a solo 401k held by my LLC?
Rents aren’t earned income and so can’t be used to contribute to retirement accounts.
I believe you can do this by starting a property management company and charging out a management fee to the rental properties. Then you just use the earnings to contribute to the Solo 401(k).
Now whether it is worth the time and or hassle to save taxes of around 5k (just the first 18k of earnings) I don’t think so. Unless of course you are a CPA or are really good at finances and can do it all yourself and find it interesting.
Good luck!
I believe it is possible but probably not worth the complexity. You would just create a management company and charge out a property management fee. With the earnings, you would contribute to the solo 401k or SEP but most likely the 401K since you can get to the 18,500 relatively easy.
The downside is that you might create PAL’s but if you did it right you wouldn’t. Also, if you have a stay at home wife (such as myself) who qualifies as an active real estate professional, you can actually create losses on the rental side to offset ordinary income while deferring income in the retirement account.
I would probably never recommend this to anyone unless they really enjoyed the structure and could do it all themselves.
Just my two cents.
Hello, question hopefully you all can clarify:
I changed jobs this year so not sure if I have this right.
Job1 TSP account, Roth employee contribution of 18500 in 2019. I start job 2, 403b plan initiated with a Mandatory employee contribution of about 2k in 2019. Employer matches. Retirement account rep for that 403b says I’m fine bc its mandated and not a voluntary contribution…is this correct? If so how much can I contribute in 2020 to 403b and TSP?
Thank you!
Mary
Mandated in a 403b. That’s interesting. HR may be right. At any rate, why would you still be able to contribute to the TSP if you left that job?
I’m doing part time work for Job1 which allows me to contribute to TSP of I want to…
Full time employee with Job2.
Thanks!
I’m not sure you can still contribute $19.5K to the TSP if you’re putting money in the 403b, mandated or not. I just don’t know. But you probably won’t get caught even if you can’t do it.
TSP is a 401k. So you just apply the 401k rules.
You have a shared employee elective deferral limit which applies to TSP and 403b. $19,500 in 2020.
Mandatory contributions should not count toward the $19,500 limit
Each plan is subject to its own annual addition limit $57k in 2020.
What category does a “mandatory contribution” go into, employee or employer though? That’s what I don’t think I’ve ever seen. Usually “mandatory contributions” go into a 401a.
Agree. Employee or employer I don’t know. But “elective” and “mandatory” seem mutually exclusive to me. So, allowed TSP deferral should be $19,500 minus 403b elective deferral.
If 403b elective deferral gets no match then I’d defer $19,500 into TSP since it’s an excellent plan.
An example of the mandatory plan:
https://hr.uw.edu/benefits/retirement-plans/uw-retirement-plan/
It reads that for the mandatory part is a is put in a 403b and it is matched. What i think is actually happening, is that the person is having a salary reduction arrangement and the UW is putting in 15% for those 35-50 age.. For those 50%, the 2.5% is technically optional so that it counts towards the employees deferral limit.
UW employees look like they have 3 plans.
UW Retirement plan 403b – mostly mandatory participation counts towards annual limits
UW VIP 403b – optional participation, counts towards both employee contribution and annual limit
WA deferred compensation plan 457 – Separate limit.
This sounds too good to be true.
I already max out of profit-sharing 401k with $51k every year through my practice.
For 2014 I made $120k as a day trader. For 2015 i have almost $300k in gains so far.
Are you saying I can open up another 401k for my day trading activities? That is ridiculous. Is it too late for 2014?
Dave-
If you are also a physician and daytrading with such success, maybe you can write a guest post.
Haha Dave, that’s a good try, but (WCI correct me if I’m wrong) 401k contribution only apply to “earned income,” and the IRS does not consider investment income, capital gains, dividends and interest as “earned income.”
Most of us are not day traders but almost all of us receive passive income/dividends on our 1099 from our brokerage account, which unfortunately cannot be put into a solo 401k.
You have to convince the IRS your day trading income is earned income. As a general rule, investment income (probably including any LTCGs and dividends from a full-time job as a day trader) is not earned income. However, if your trading is substantial with continuity and regularity and you are using the income from it for your livelihood and spending a great deal of time doing it, then I think you can make a case that you are in business as a securities trader. I think part-time while working as a doc is going to be a stretch, but if you think you can win in an audit….
Yeah I’m fairly sure I qualify as a day trader in the eyes of the IRS rather than an investor (http://www.irs.gov/taxtopics/tc429.html)
I’ve been able to take advantage of various tax deductions related to my day trading activities. I’ll have to talk to my accountant about doing this additional 401k though.. i doubt he is aware of it.
My CPA states that income as a day trader is not earned income so it’s a no go for me.
Had me pretty excited about the potential.. but oh well.
Unless day trading is your job. In your case, it isn’t. But in the case of some people, it could be. You just have to be able to convince the IRS it is your job. However, that will be tough since most day traders don’t make money.
You are right. Actually my CPA said I could do it if I formed an S-Corp and set up a payroll. Too late for 2014 but could do it for 2015.
Probably not worth the trouble though as I plan on quitting day-trading this year.
Dave-
If you are a physician and daytrading with such success, maybe you can write a guest post.
I think it is the controlling groups that is stumping me. Say I own 100% of a pllc that has 1099 physicians + myself working there and am a sole proprietor 1099 at an addiction center. This qualify me for 2 401k’s? If not, what can I change to make it happen?
You are the sole owner of both businesses- one 401(k). I think that one is pretty clear. Maybe if you gave most of your pllc away to the other docs you could qualify for another 401(k). Probably not worth it.
Why would you say that he can’t have 2 401k plans? If he had the same business and tried to shield some income as his personal 1099 income, then there would have been a problem if he tried to have 2 different plans. These are two distinct businesses, and even though he has control of both of them, I believe he can have a 401k plan for each. Controlled group would be if he had employees in both groups, then he’d have to cover both sets of employees with a single plan. But in this case, I believe that he can have a Solo 401k for his 1099 work and a separate 401k for his PLLC. I’d be happy to check with my TPA on this, but I’m almost certain having 2 401k plans is possible if you own two distinct businesses, with one of them being a solo proprietorship with 1099 income.
He can probably have two plans, but I would contend that they share one $53K limit because they are “affiliated”, meaning he is the sole owner of both of them.
I do not believe so. They will share the $18k limit, that’s for sure. If what you are saying is true then he would be limited to just a single plan, but we’ve established that that’s not true. In any case, this stuff can get pretty complex to it is highly recommended that anyone in this situation talk with someone who can help them figure it out because any advice offered here is approximate at best (since we don’t know the entire situation).
Then what’s to keep an independent contractor physician from just forming 4 different LLCs, working for each one for a quarter each year, and then using four individual 401(k)s each with a $53K limit. The IRS isn’t going to let that slide IMHO.
Yes, exactly. THAT is not going to work. IRS will pay you a visit for sure. These have to be legitimate entities/businesses. Even then IRS might wonder. Not everybody at IRS is an expert at this, I bet. That’s why each entity has to be in order. This is a job for an entire team consisting of a CPA, business attorney, TPA and adviser. Ultimately it will be the CPA filing taxes, so I’d get them involved before doing this (even if they disagree, at least this can start a conversation). In one case the TPA and myself were talking with the practice attorney, and disagreeing, so we felt that we needed to bring in an ERISA attorney on the matter. It can get this complex when the business attorneys start messing with entities to try to find loopholes. So my suggestion is to get your team together and discuss this before doing it, despite the WCI stamp of approval 😉
I’m saying even if the entities are legitimate, if you are the sole owner of all of them, you only get one 401(k). Do you have a source saying otherwise?
My TPA says this can be done, but each case has to be examined on its merits, so we can not generalize this to everyone. If you have different sources of income, you can open a retirement plan for each one of them. If you are getting 1099 income from multiple sources you can potentially open a plan for each source. At some point if you have the same job but different 1099s you’ll have to aggregate this income for the purpose of having a plan.
So someone with two 1099s from two contract agencies might have to aggregate this (again, talking with a CPA or with IRS might help). But someone who has two different contract jobs doing different tasks might be able to have 2 plans. If a doc does two 1099 surgery jobs, these might be aggregated as well.
Seems like a pretty gray area to me. Not a reason not to do it, but good to be aware that you may have to defend your decision in an audit.
I agree. This is one area where it pays getting accurate advice. Most advisers, CPAs and even TPAs might not know or might not want to stick their neck out.
Kon,
Do you mean it’s ok to have 2 401ks despite being owner of both businesses if the 2nd business is clearly a separate line of business with no employees?
Do you have a quotable irs opinion or case or publication for this? thanks
Last I heard, he was looking into it. If he finds something, I’ll update the post because that would obviously be a significant change.
If your 2nd unrelated (or not identical) business does not have employees, then maybe. Sometimes it is obvious that the answer is yes, and sometimes I’d have to consult a CPA or an attorney to get an answer. I don’t have anything from the IRS. I can provide a referral to an ERISA attorney who can give you a written opinion that will stand in court. Getting answers out of IRS might not be that easy (and their opinion letters might cost a lot more).
Yup, I’m still looking for an answer. I also want to have some clear rules on what’s allowed and what’s not.
That’s the tricky part, isn’t it.
Here’s my take on finding a general rule that says when one can open solo 401k plan(s) for various entities one controls. Because there are infinite number of combinations, there isn’t a set of rules that address every possible one. There are no ‘rules’ that anyone can point to that say when you can open another retirement plan (or a number of such plans). However, there are rules that tell us what we can NOT do, and these are the affiliated/controlled group rules. So we’d have to consider each example on its merits based on the affiliated/controlled group rules. Before opening a solo 401k plan or a number of such plans for various entities, we have to apply these rules first. If we pass, then nothing really stops us (aside from aggregation of limits). Unfortunately, we have to rely on ERISA attorneys and those who understand these rules very well to provide guidance in cases that are not obvious because these rules can get extremely complex.
I think that everything is here:
http://www.irafinancialgroup.com/solo-401k-plan-controlled-group-rules-affiliated-service-eligibility.php
My understanding from your link is that controlled groups do matter so a sole proprietor of many different businesses still only gets one plan because they’re all a controlled group.
My take is this. Controlled group only matters if you have businesses with employees. If you have two separate businesses, without employees, you can have two different plans. The whole idea behind controlled/affiliated group stuff is to make sure that all of the eligible employees are covered. Without employees, you can have two plans for two sources of income. The whole point is to prevent you from opening a plan that shortchanges your employees from another business.
“In other words, the rules are in place to restrict the owner(s) of a business with full-time employees from establishing a new company with no employees and adopting a Solo 401(k) plan that would exclude the full-time employees from the other company”
Well, the question is moot to me since I barely make enough with WCI to max out one 401(k), much less two. But it seems a pretty gray area to me. Certainly I think you’ve got an argument that could be used in an audit or tax court case. I have no idea if you’d win the audit/case though.
I agree, that’s why if I’m even 1% doubtful about a particular arrangement, I’d rather pay an ERISA attorney for an opinion letter than to have to pay for an IRS audit. By the way, just as a word of caution. My TPA is also an ERPA, so she gets to see what causes IRS to audit various plans, and she told me about a doctor who had a solo 401k on the side with his wife in addition to the practice 401k plan. Everything was legal, except that the wife took out a big loan out of the solo 401k and that triggered the IRS audit. You never now what will trigger the IRS audit, so it is better to be safe than sorry.
If you are part of a controlled group (i.e., if someone owns 100% of two businesses), you only get one 415 limit ($53k).
Whitecoat, I enjoy your blog. I would encourage you to tidy the controlled group rules a little. There is a little more that goes along the 80% brother-sister relationship to determine if it’s actually controlled. I’ve had plenty of clients who meet the 80% rule, but due to the additional 50% effective ownership rule, do not meet controlled group requirements. You can find it here http://www.irs.gov/pub/irs-tege/epchd704.pdf.
Thanks for the link and comment. Very helpful.
I will go ahead and correct myself. Sometimes knowing 1/2 of the right answer is the same as being 100% wrong, so here’s the scoop on whether a doc can open a solo 401k for the 2nd entity that they control.
If you have a controlled group or a controlling interest with two entities, for the purpose of having a retirement plan, both of the entities are treated as one. Controlled group is triggered by owning 80% or more of both entities. A controlled group does not allow having TWO separate 415 limits, so only one 415 limit applies ($53k).
http://www.irafinancialgroup.com/solo-401k-plan-controlled-group-rules-affiliated-service-eligibility.php
So for example, if the doctor owns practice #1 AND they have practice #2 (whether a sole proprietorship or not, with or without employees). In his case, the doctor has a controlling interest (80% or more of both entities), so BOTH entities have to be considered as one. And as a result, only a single 415 limit is available.
Does this mean that you can’t have a separate plan for the practice #2? NO, it does not. Here’s why. You can exclude one of the two practices from coverage, if you can pass the minimum coverage test (ratio of NHCEs to HCEs) and at least 70% of NHCEs should be covered. This test is clearly fails for the practice #2 that is a solo proprietorship. But then you can also see if some of the practice #1 employees can be legally excluded if you can pass the minimum coverage test. So for a sole proprietorship the answer is NO – if you are a controlled group, you can not have a separate solo 401k plan.
There are endless variations on the theme, and each one would require a fresh look. Just because you have a controlled group does not mean that you can’t have separate retirement plans, as long as they are tested together and can pass all the tests, it may be possible to have separate plans. I’m no expert in testing, and this is where I’d get a TPA involved.
Another thing to watch out is affiliated service group, which applies specifically to medical/dental practices. You might not have a controlled group, but if you have an ASG, the same rules apply – one 415 limit and one group for plan testing purposes. Even with ASGs, you can potentially have separate retirement plans for the principals and for the employees, as long as you can pass testing. Then you also have to watch out for attribution rules (especially husband/wife and children). So, bottom line, don’t try to guess – talk with an ERISA attorney and get it all in writing because it would take an endless number of examples to illustrate all possible cases, and sometimes the same example can yield a different answer if the facts of the case are just a little different.
You lost me in there. Explain a couple of things again. First, how is an affiliated service group different from a controlled group and second can you provide a concrete example where a doc owns 80%+ of two businesses but can still get two 415 limits.
Quoting from above: “An affiliated service group is one type of group of related employers and refers to two or more organizations that have a service relationship and, in some cases, an ownership relationship, described in IRC section 414(m).”
This was apparently enacted to cover any loopholes in the controlled group rules. So you can have two entities that are NOT a controlled group, but they can be an affiliated group if one performs service for another. So any arrangement where a spouse has a separate entity and provides services to the other spouse’s practice might be an ASG. This would disallow having a solo 401k plan for the entity.
So for example, suppose that a doctor owned 50% of a practice and also had a 100% sole proprietorship. This is not a controlled group. But if the same doctor performed work for the practice (and his sole proprietorship income originated from doing this work), this is an affiliated service group. The ASG rules are even more complex, and I don’t claim to be an expert, but many medical/dental practices are often broken down into ‘solo’ entities, which might avoid some controlled group rules, but they are always caught by the affiliated service group rules.
If the doc owns 80% of two or more businesses, this creates a controlled group, so the doc can only have a single 415 limit. However, they might be able to have two separate PLANS, say one for entity 1 and one for entity 2 (or none for entity 2), but with a single 415 limit. The idea is that you might be able to exclude one of the entities (if you pass the coverage test), or to have separate plans, but with a single 415 limit. This is one big point of confusion that I’ve had before. They really nailed the small practices with that one.
This is where Defined Benefit/Cash Balance plans come in – you might be able to get a bigger bang for the buck with these vs. 401k.
I really enjoy reading this discussion and have a question:
I have a new client who is an attorney that has an S corp which is a partner in an LLP, the S corp receives income from the LLP and a K-1 at the end of the year. The K-1 shows the health insurance paid on behalf of my client and an $18,500 Roth 401k contribution.
My client also has a solo 401k where she contributes $18,500 as an employee and $35,500 as an employer.
can she do that?
Isn’t she deferring too much ?
Thank you in advance for your comments
Gabriel
No. That’s two employee contributions.
Konstantin Litovsky: Would you be able to provide the contact info for the ERISA attorney you used? I am interested in getting their guidance & written opinion for our own situation. We have an operating company (S-corp with employees) and another LLC (no employees) which own the office building that the S-corp is occupied.
There is enough income in both businesses to max out both 401K plans. Our TPA said yes, we can open a 401K plan for each business. Just wanted to get a second opinion from a tax attorney before proceeding. Thanks!
I’ll save you some time and money. Based on the facts you provided, you can’t use the LLC income to fund a retirement plan because it is passive income. So that makes this really easy. Your TPA is 100% wrong, you might want to consider a different TPA because if that’s the level of advice they are providing, I would worry that other things might also not be up to par.
Thanks for the reply Kon Litovsky. Sorry, I was not very detailed with my post above regarding the LLC. I understand passive income can’t be used to fund retirement account. But if I get paid via W2/wage from that LLC, wouldn’t that income be eligible? (only if we get passed the issue with having multiple 401K accounts from multiple companies (in controlled group situation). The income tax savings here may be much higher than employment/payroll taxes.
Few other issues that are also in the gray area are: A) If your businesses are considered “controlled group”, does the rule prevent you from open multiple 401K accounts? B) Or does the rule still allow more than one 401K accounts from multiple “controlled group” business BUT cap it at the maximum of $55K (for 2018)
In the event that the rule does allow multiple 401K accounts for multiple “controlled businesses” but cap at $55K, I can see it still very beneficial in certain situations. For example, your Company A with employees, you can only put in $35K max due to certain calculation/testing method. Your Company B (as LLC without employees) can pay you W2/wages, and you can use to put toward that $55K limit in the second 401K plan.
Does that sound like a correct interpretation of the rule? Thanks again for your insight!!!
I don’t believe you can get a W2 from passive in come LLC. You might want to talk about your CPA about that – this would be too easy to circumvent the passive income limitation. Passive income is passive income. You can qualify as a real estate investor, and this might allow you to get a W2 from your LLC, but this is tricky and requires substantial proof as the IRS is surely going to audit you (such as ~700 hour work requirement, and many others).
You can have multiple 401k accounts with a controlled group, financially it makes no sense because of cost and complexity.
With a controlled group you get a single $55k limit for all plans, and that’s that. It is as if you have a single plan with multiple accounts, that’s the effective result of having a controlled group. Thus, it is never a good idea to have multiple plans with controlled groups. There are also fiduciary issues, since you can’t have substantially different plans with different options/expenses, etc. So a single plan will always be better.
There are different instances of controlled group rules with leased staff where the staff are employed by another entity that pays them a W2. In that case this can benefit the owners because their employer contribution will be lower by the amount contributed by the entity that employs the staff.
SmallBusinessOwner, if you are still looking for an ERISA attorney to talk to about the controlled group rules, I would reach out to Derrin Watson. You can find him here: http://ferenczylaw.com/s-derrin-watson/
He’s fantastic! I scheduled a call with him and my client and he had their situation straightened out within an hour.
Great Post…I would like more info on Brother Sister groups if you have any links or posts coming.
Thanks
There are two major concerns: controlled group (when you own more than one entity with employees, where ALL employees have to be covered because the entities are part of a controlled group), and affiliated group (when there are multiple entities that are affiliated and employees might end up in a separate entity, so all such entities have to be included when it comes to offering a retirement plan to eligible employees).
It is not always easy to spot the problem, so if you believe you have such an issue, you will need to speak with someone who is knowledgeable about this to get an opinion. In some cases we refer our clients to ERISA attorney to get a written opinion, because this is a serious matter that can not be taken lightly.
I suggest this link to start:
http://www.irs.gov/pub/irs-tege/epchd704.pdf
Suspect my situation is a brother/sister controlled group. I’m a partner in a physician owned group. There are 8 of us. We all max out a 401K at 53K (more for the older guys). Also we have a joint venture with a dialysis provider. All 8 of us do not participate, and the 7 that do all have differnet ownership interest. I purhcased my percentage with with through an LLC owned by me. We are all minority partners to the dialysis provider. I get a K1 for the income through the LLC. I hope this is less confusing to read than it was for me to write.
This may depend on how “minority” you guys are. If you all own 2% total of the dialysis business, they may not be related employers.
You might have an affiliated group. In that case you might have to offer the retirement plan you have to your dialysis provider. This is a serious matter – if you do not cover all of the employees legally entitled to get coverage under the IRS rules, you might get a hefty IRS fine (that adds up the longer this arrangement has been in place). We have been dealing a number of these types of issues, and we usually determine beforehand whether there is a controlled or affiliated group before doing a plan (not doing so can be costly to the plan sponsor). You will need to have your plan and corporate structure examined by someone who can tell you whether you have an affiliated group and they should also give you advice on how to fix your plan if that is indeed the case.
Great post.
If a spouse has an LLC business (single employee) with around $10-20k in earned income, I believe the limit of Solo 401k contributions is 100% of her earned income? I was hoping to use my income to increase tax sheltered investments (up to $53k) via that route, but don’t think that will fly with the IRS. Is that correct?
Correct. Maximum for her is $18K (if under 50) plus 20% of earned income up to $53K total, but no more than her total earned income.
Beginner here….
“Total earned income” is gross earnings or earnings after deductions?
Do Roth contributions get deducted from the totals you mentioned?
Thank you!
Total earned income is the total income that is earned. Things like S Corp distributions, dividends, and rents aren’t earned income. Business expenses are subtracted before you get to your income. Personal deductions are not.
Roth contributions have to be from the employee contribution portion ($18.5K in 2018).
Hope that helps.
I checked with my CPA and he was not convinced. Here is my situation.I am part of a group practice where I get a K1 .We don not offer any retirement plans to our employees and so do not use this income for our retirement plans as well.I do get a 200k worth 1099 for being a medical director and use this to max out the 52k for a solo 401k. I have started working in an LTAC facility and formed an LLC for billing this service and expect to have some 100k income.I was hoping to open a 401k using this income.
Two businesses both owned 100% by you? I agree with your CPA. One 401(k) total.
As with above post, you might have an affiliated group. Did you get professional opinion on whether you can legally exclude employees from your group practice plan? In most cases this is rather easily determined, but sometimes we have to go to an ERISA attorney for a written opinion (the cost of not doing so can be huge). This sounds to me like a big problem waiting to happen. If your employees are shared by your practice, you have to offer your group plan to them. IRS will not like this one bit if it turns out you are excluding employees that should be legally covered under the law.
You can indeed open a solo 401k plan for any 1099 income not related to the main practice, and potentially you might open another 401k for your second business (billing service). I believe that if you have different entities you can have a retirement plan for each one, but the salary deferral can be only $18k for all of them.
one small correction to above:
You can indeed open a solo 401k plan for any 1099 income not related to the main practice, and potentially you might open another 401k for your second business (billing service) IF you don’t have employees for your billing service other than spouse employee (that’s key).
What about the following twist on example 3:
W-2 employee of a hospital. The same hospital hires independent contractors as well to fill in gaps, and the hospital will allow you to pick up extra shifts and pay you as an independent contractor for 1099 income for the extra shifts. Can you then contribute to both the hospital’s 401k and a solo 401k?
Sure. One employer is the hospital. The other is you. Remember only one employee contribution between the two. I’d worry more if I were the hospital honestly. Seems hard to justify paying you sometimes as an employee and other times as an IC.
Can I add a twist here: what if instead of the second income being 1099, it is guaranteed payments via a K-1? To explain further, instead of a single hospital, say it’s 2 affiliated entities, in one of which I am a small partner (so, they are a controlled group, but I am not part of it). One pays me W-2 income, and has a 401k to which I contribute. The other pays me a guaranteed pmt and gives me a K-1. Can I contribute to a solo 401k based on this K-1 income? Thx!
Yes, K1 is partnership income, you can contribute that into a solo 401k. Just be mindful of the contribution limits.
And it’s not a concern that the partnership already has a 401k? (it’s not the partnership itself, but its controlled group, but still).
Yes, that’s what I’m worried about.
Sure, they have a 401k plan, I don’t see why you can not have your own plan for any 1099 income you get from them as well. Same thing if you are an employee of a hospital and also get 1099 income from the same hospital. There is no issue there as far as I understand your situation. Just make sure you coordinate your contributions.
What do you mean by coordinate the contributions? The question I have is whether he gets two $53K limits in this situation. I guess so because one business is owned by someone else, and one is owned by him.
So the two entities are affiliated – this has nothing to do with OP. This does not sound like a controlled group to me, because OP is not an owner of the other business (unless he owns more than 50% of the other business). Whether two businesses that employ him are affiliated or not is not really an issue – they can be the same business for all we care. As long as he’s an employee in one and 100% owner in the other one, I believe he can have two limits, unless I’m missing something.
K-1 is like 1099 income, so no biggie there. I’m a little worried about the fact that the two businesses are affiliated and worry that your total limit between the 401(k) and the individual 401(k) would be $53K instead of $106K. Might not even be much of an issue if the K-1 income is small and you’re not maxing out the $53K limit on the W-2 401(k). But if you’re trying to get more than $53K in, might want to look a little more into this.
Thx, WCI. I believe the actual snag is that the employer is considered the partnership (e.g., definition of Employer and Partner in Pub 560). So, there is actually no solo 401k allowed from the K-1 income at all. The partnership must set up a 401k (and do the employer contributions). In my case, the partnership’s controlled group already has a 401k, so no second $53k here.
That’s the way my partnership is set up. But I’m not sure what the rule would be if the partnership didn’t have a 401(k).
Yes, I believe that FD is right. The partnership is the employer. If they do not set up a 401k plan, you can not have your own individual account. However, if they do have a plan, you can have a ‘brokerage only’ plan where every partner has their own individual accounts. Case closed!
I thought solo 401ks only allowed contributions based on “salary” and not the K1s of an scorp/partnership. I could definitely be wrong here as I am not a expert in this area. Maybe that restriction is just for SCorps.
‘Solo’ or ‘Individual’ is specifically for solo business owners, not employees. It is net profit from any direct earned business income. In fact, W2 is specifically excluded from solo 401k contributions because if you are not the owner of your business, but rather an employee, you are not eligible to open a solo 401k plan – you have to own your business to be able to do that. However, if you as the owner pay yourself a W2, that’s fine.
I will ask my TPA and see whether I’m missing anything here. Are you paid as a sole proprietor by the 2nd entity? Then why K1? Are you a partner of the 2nd entity as well?
The contributions for Scorp and C Corp into solo 401ks are based strictly off of W2 wages the owner pays itself. The K1 distribution for Scorp owners is not used to figure any contributions into a Solo 401k. I’m soaking strictly of single member/owner SCorps and C Corps. I guess that maybe a K1 from a partnership doesn’t fall into this category?
Right. K-1 distributions from a partnership are certainly eligible for 401(k)s. That’s all I get from my partnership.
But this is partnership’s 401k, right? Not solo?
How does this work with Locums docs?
If you sign contracts with 2 different Locums agencies who both pay you as a 1099 contractor, do you get to establish a Solo 401k for both?
What about working for different hospitals under a single Locums agency (as is typical)? One Solo 401k for each hospital or just a single Solo 401k for the agency itself?
If your situation is such that you can establish multiple Solo 401ks, do you think it best practice to establish them at different investment houses (eg one at Vanguard, one at Fidelity, etc) or keep them under the same roof?
Interesting post. Thank you.
No, you have one business with one owner. One 401(k). Just because that business has multiple customers doesn’t let you open multiple 401(k)s.
I think he mean, locum company x employs him to work in philly, while locum company y employs him to work in NY, can he have two 401Ks then?
I believe that as a sole proprietor (not as an owner of two businesses), all of your 1099 income will be aggregated so one solo 401k. If you had two physically different business entities, then more plans are possible.
No, since he’s a 1099 guy, HE is the employer. The locums company is a customer, not an employer.
I have just started as a new attending in the past year. I’m trying to figure out how to maximize my retirement accounts.
My setup:
Partnership (technically 2% soon to be 50%) with K1 or 1099? income 300k
Separate 1099 income from hospital system for call coverage 80k
I have formed an s-corp and all income goes into the s-corp. I then take a modest salary around 120k. I know this number will have to go up but my call coverage and salary have been increasing so this is what it has been.
The partnership has a retirement plan that has an old defined benefit plan or something. My partner is near retirement and the staff has had little interest in contributing to this plan. In speaking with him it may not be possible/desirable to contribute to this plan.
It seems my best option would be to open a 401k plan with the partnership which would be offered to the employees and my partner would likely opt out. I could then have a separate individual 401k for my 1099 hospital employed income? Does the fact that all income is going into my personal s-corp change the ability to have 2 separate accounts? Are there any other options for accounts at my personal s-corp level?
Does the partnership pay you on a K-1 or a 1099? Also, you need to get the details on the partnership plan. It could be anything from a 401(k) to an insurance product.
At any rate, if your goal is to maximize your retirement accounts, you’ve chosen a salary that is way too low. You can only put in $18K + $24K = $42K due to that choice. Might want to rethink the S Corp.
If you didn’t have the S Corp, and you didn’t own 50% of the partnership, and the partnership had a 401(k)/profit-sharing plan, then you would be able to get $53K into the partnership 401(k), and another $16K into an individual 401(k).
Don’t forget backdoor Roth IRA for you and spouse and an HSA.
Ok. I will find out details on the current plan. What if instead of the 1099 call pay going into my scorp I had it go directly to me. That would bring my salary up to the 120k (Scorp) +80k (call) = 200k that increases the amount I can put into a 401k and maybe gives me the option of a second individual 401k for my call 1099 pay. Is that right?
OK. I will find out the details on the current plan.
What if instead of having my 1099 pay From call go into my S Corp. I had a good directly to me? That would bring my total salary to 200 K. 120 K from S Corp. salary and 80 K from call pay. That would increase the amount I can contribute. Does that also give me the option of a second individual 401(k)?
You might be able to have your hospital 1099 income go to your S-corp. But what’s the point? Your income is $300k, so you can make your salary whatever it needs to be to max out your practice plan.
For your hospital job, I’d do 20% profit sharing and the rest after-tax. For your practice 401k I’d set the salary to minimize employer contribution while maximizing your own at $53k.
I think you’re better off separating the jobs. Taking $200K in salary from the partnership and getting some kind of 401(k) there. It may cost you some matching dollars for employees, but if they contribute enough you could put as much as $53K in there. Then take the other $80K not through the S corp and use that to make a $16K individual 401(k) contribution. But a lot of it depends on what this current plan is and how the practice is structured.
I agree that due to his practice situation (with employees) he needs some professional help sorting this all out.
You have to be extremely careful with a defined benefit plan. If your partner leaves you with this plan, you might be on the hook for a lot of money, not to mention the termination fees can be pretty steep ($10k is not unheard of). Before becoming a full partner, you should figure out the type of plan he has, and possibly ask him to unwind/terminate it (at his cost). If this is indeed a DB plan (not a profit sharing plan) that is. Employees are not asked to participate – they simply get a contribution from the employer. If he had a plan for just himself, then it wouldn’t be that big of a deal, but with employees, you can’t mess that one up as there is a huge liability to make sure everyone gets paid out what they are due.
WCI, I believe that Fox has employees in that practice, so that makes the matters much more complex. The practice 401k plan would have to be evaluated based on the practice demographics. As long as he owns 50% or less of the practice, he’s fine as far as having a second plan for the 1099 hospital income. The actual salary he would need for himself would depend on multiple factors. For example, to max out the plan at $53k, with employees, he might be able to do that with say $180k. But employer contribution could be very high. However, at $220k he would also max out the plan at $53k BUT the employer contribution might actually fall significantly.
We just did a design study for a doc, and it turned out that by increasing the salary to $230k saved them as much as $20k in employer contribution vs. keeping the salary lower.
Bottom line: Fox needs to sit down with someone to evaluate the plans they have as well as to figure out the best plan for their practice given that both will now the partners. Lots of moving parts here.
He did say it is a defined benefit plan and that it is a closed plan and that I can’t be added. Hopefully if that’s the case I wouldn’t be on the hook for anything, but thanks for the red flag. I never would have thought of that. I will definitely look into it before taking that partnership step. We do have about 6 employees and he has made contributions for them in the past.
The plan is either terminated, frozen or active. You’ll need to find out which one it is.
Does he also have a 401k plan in addition to a DB plan? The problem is that some of the older docs are not very meticulous when it comes to retirement plans, so you don’t want his problems to become yours. This is true especially with the plans that have been around for a long time.
Just make sure that you educate yourself on retirement plans, as the plan you’ll have would be just as complex as that for a big company, but you’ll have a lot less resources to manage it, so understanding exactly what you have (and how to get the best value out of it) is going to be key. The following are two articles I wrote for WCI on small practice plans that will give you some ideas as to what is involved:
https://www.whitecoatinvestor.com/small-practice-retirement-plans-part-1
https://www.whitecoatinvestor.com/small-practice-retirement-plans-part-2
Update:
To answer an earlier question I am paid by K1 from partnership.
I was finally able to speak with the pension provider for my partner. There are currently 2 plans: a defined benefits plan which is frozen and a profit sharing plan which he has been contributing on behalf of the employees.
I asked him to do an analysis for my current situation and practice. He says he is going to run the actual numbers but he doesn’t think any qualified plan will be worth it for me. He says because most of the employees are older than myself and because of the expense of matching contributions it wouldn’t be worth it. He says as you alluded to I’m in a very unusual circumstance.
He also said that I could not legally have a separate plan for hospital 1099 income based on it being a controlled group.
I believe he understands my practice situation well as he has worked with my partner for nearly forty years. It does make me wonder if he has conflicting interests (what’s best for me is not necessarily what’s best for my partner) and maybe I need a second opinion. If his recommendation still doesn’t change after running the numbers it looks like I may be stuck with a taxed account. Frustrating! Thanks for your input.
The frozen plan has to be terminated by your partner. You can’t be stuck with it. The cost of doing so can be way too high.
Sometimes it is obvious and sometimes it is not. You might be fine for a while as long as your partner still participates in the plan. Let him run a cross-tested plan design and show you the results. If that one fails, chances are your employer contribution might be too high, but he has to make a good effort to optimize the numbers to make sure that he does all he can to give you a good design. Sometimes it is just not possible, but the numbers will show it. Then you might want to have another TPA do a design illustration to see how these two compare. If he refuses to do this for you, get another TPA who will do what you ask of them.
I don’t think he is correct about your 1099 income. As long as you own 50% or less of your practice and you own 100% of your 1099 entity, your total ownership in both entities is less than 80% so there is no common control. If somehow your 1099 income is related to your practice income, that would be something else entirely (an affiliated group). So I believe that based on these facts, you can indeed have a solo 401k for your 1099 income. Things will change when you become 100% owner though.
Investing in a taxable account isn’t the end of the world. Do it smartly and you can minimize the taxman’s take.
Great post..
Looking at example 3,
If I have 18k 403(b), 18k 457(b) from my employer that makes a total of 36k of contribution.How much I can contribute from my 100k 1099 income towards Individual 401(k)
If you’re using your 403B for the employee contribution, then just under $20K.
It’s 25% profit sharing on SCORP salary., the 20% is for net earnings of sole props/llcs.
So here’s a question I probably need an accountant to figure out. I made about 15K moonlighting last year. Does it make sense to deduct some of my medical expenses (license, board certs, etc) as business expenses (aka lowering net profit of my sole proprietorship), or as personal?
Here’s the catch, I have a SEP IRA for my moonlighting “business”, so less expenses (more profit) for my business lets me contribute more to that. Don’t have any other above the line options. It makes my head hurt to figure all this out, and makes me realize my taxes may finally be complicated enough to justify an accountant….
I’d take the deductions.
At some point you might consider changing your SEP-IRA to a Solo 401(k). Fidelity’s Solo plan accepts IRA rollovers. This is what I did so at to have no hindrance from the pro rata rules for my yearly Backdoor Roth.
with SEP you wont be able to do back door ROTH
Kahn or WCI, can you elaborate on this?
Here’s my situation:
400K on W2 in 2014 and maxed out my $52K with MPP/PSP/401k.
Small additional amount (2K) on 1099 from moonlighting
Already contributed $5500 to backdoor roth for 2014
Is it worth opening a SEP-IRA for my 2K of 1099 income for 2014, and then converting to solo 401k later? Am I still able to do this after having maxed out the backdoor roth for 2014?
Thanks!
Yes you can, but not worth opening a SEP at this point and having to do rollover for just $2k. Just open the solo 401k. I like solo 401k over SEP because if you don’t have a good plan at work, you might want to contribute the salary deferral into the solo 401k, not the SEP.
That’s another good reason for Solo 401(k) over SEP, aside from preserving the ability to do a backdoor Roth.
The backdoor Roth is limited to $5,500 or $11,000 if married. Someone could use their SEP to contribute more and just convert it, and then also still do the BD Roth.
You’re talking about saving something like $150 in taxes. If it’s worth that hassle, then go for it. It probably wouldn’t be worth it to me. I’d just spend the money and call it good.
Don’t forget that 401(a) plans have a separate limit, too. 401(k) and 403(b) are the only ones that share a limit.
My setup at an academic institution:
401(a) with 5% fixed employee contribution and 10% of IRS limit employer contribution
403(b), no match
457(b), no match
Add in backdoor Roths and HSA and I feel like I have plenty enough tax advantaged space.
Hi,
what would the best way to invest in my situation
job #1
Full time hospitalist,w2 job,Roth option available
457 governmental with 5 k match for 5 k I invest ,immediately vested.THROUGH VALIC[not the best choice of funds]
JOB#2
part time w2 job
403 b – will invest to max[usually do]
non qualified 457 – 13k
hospital pays 1-2% of my income as match as 401A[last year 692 dollars]
1090 locums[upto 60k a year]
solo 401k
maximum upto 9000 dollar
I do HSA 3300,backdoor roth 5500.What else i can do to maximize my retirement investments.Thanks
You can always save in a taxable account- index funds, real estate etc. There’s no reason you’re limited to just retirement accounts. Remember as you add up your totals that you only get one employee contribution- either the 401(k)/Roth 401(k) at job # 1, the 403B at job # 2, or the employee portion of the individual 401(k) at the 1099 job. If one of those first two jobs is giving you a match/employer contribution, then make sure you get it. If not, use the rest of the employee contribution in the individual 401(k). The 457, HSA, and backdoor Roth, of course, are separate.
Also be sure you look carefully at the update to this post about 403(b)s in Rule # 7.
Here is my situation
i joined a private practice group but I won’t be able to contribute to the groups plan until after 1 year.
Is my best option is to open a solo 401 k and contribute $18000 + 20 % of my total earned income for a total of $53000?
I plan to do a backdoor Roth for my wife and myself
It doesn’t sound to me like you qualify to open an individual 401(k). You can obviously do a backdoor Roth, pay down some loans, save up a downpayment and have your $18K (or whatever you’re allowed to contribute) ready to go at the one year mark (allowing you to frontload it.)
Really informative. Thank you. Good solutions to maxing out on qualified plan contributions. Are you a fan of non-qualified plans as well?
Non-qualified can mean many different things. What did you have in mind? Something like this?: https://www.whitecoatinvestor.com/the-california-private-retirement-plan/
Yes, that is exactly what I mean. Thank you for directing me to that article by Mr. Adkisson. I find that once high income earners max out their contribution to a qualified plan, they like to take advantage of the unlimited maximum contribution feature of the nonqualified plan.
I appreciate the emphasis in that article on the need to have a plan. In my experience, people have created problems for themselves when they take the “stop-and-go” funding approach.
Great post.
Here is my situation.
Job-1: full time hospital employee. 403(b) fully contributing by me, no employer matching. 457 plan has 2% employer matching, I’m fully contributing per IRS limit.
Job-2: moonlighting independent contractor as solo proprietorship.
Should I open individual 401k or SEP-IRA for job#2 ?
My sincere thanks to you for backdoor Roth which my wife and I started from last year since after subscribing your newsletter.
Think about how that SEP will screw up your newfound backdoor Roths. Seems obvious that the individual 401(k) is the way to go even if you put your entire employee contribution into the 403B.
Also be sure you read the update to this post- Rule # 7 about 403Bs.
I have a 457B in my main job, can I still contribute my employee contribution of 18,000 to my solo 401K?
Thanks!
Yes. Totally separate limits.
Thanks!!!
I wonder if you have an investment property held in LLC, which you’re sole member of, whether or not because of this LLC you can establish a solo 401k and contribute some (if not all) rents from the said property into that 401k?
Thank you!!
No. Rents are not earned income, even if the property is owned by an LLC.
I own 25 percent of our medical practice. I own 100 percent of an LLC that is a consulting type business. Do I meet the controlled group “second type” criteria? Can I have two 401k? The one for the main medica group is where I put away the 53k. Can I open a second 401k for my consult business? Thanks.
I think you can. As I understand it, a brother sister group is one where 5 or fewer own 80%+ of both businesses. Since you only own 25% of the first, and none of your partners own any of the other, I think you’re okay. This is similar to my business where I own less than 1% of my practice partnership, and 100% of WCI. Wouldn’t hurt to get a professional opinion on this from your accountant.
I believe that you can have a second solo 401k plan, if you don’t have employees in the consulting business (aside from your spouse).
Obviously many of us are in your debt, WCI. There’s going to be a whole generation of retired docs blessing your name in a couple of decades!
Private Practice 401(k) – Contribute just enough as employee ($11k) to maximize match
Solo 401(k) – Contribute remainder of employee contribution ($7k) (since I have better investment options here than in practice retirement plan thanks to senior partner there who believes strongly in active management and just happens to have a child employed as an adviser by Edward Jones!) + 20% of net 1099 earnings
Wife’s 403(b) – Works part-time so her entire salary goes here until she reaches $18k
HSA for both of us
My Backdoor Roth
Wife’s Backdoor Roth
A possible addition for 2015 will be a Mega Backdoor Roth in the Solo 401(k) as described by the Finance Buff (http://thefinancebuff.com/after-tax-contributions-in-solo-401k.html)