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 $57K limit in 2020 thanks to inflation, but all the same principles still apply.
I get tons of questions on multiple employer 401(k) 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.)
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):
Multiple 401(k) Rules
Rule # 1 One Employee Contribution Total
In 2020 the IRS only allows you to make a total of $19,500 ($26,000 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 $19.5K ($26K if over 50) or less.
Rule # 2 $57K Per Unrelated Employer
The IRS also only allows you and your employer (which might also be you) to put a total of $57,000 ($63,500 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 anyuway) 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:
Example One
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: $19.5K
- Hospital 2 401(k): At least $7K (plus the $3,500 match) = $10,500
- Plus another $6K into either hospital's 401(k) (pick the one with the better investments)
- Plus $6,000 into a Backdoor Roth IRA
- Total: $52,000
Example Two
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 dollars?
- Partnership 401(k)/PSP: $57K, of which $19.5K can be Roth
- Partnership DB/CBP: $30K, of which $0K can be Roth
- Website Individual 401(k): $57K, of which $19.5K could be Roth if none of the Partnership 401(k) money represents an “employee contribution.” Otherwise, $0K Roth.
- Personal Backdoor Roth IRA: $6,000
- Spousal Backdoor Roth IRA: $6,000
- HSA: $7,100
- Total: $163,100 of which $39K can be Roth
Example Three
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): $26K employee contribution (50+) + 20% * $100K = $20K employer contribution = $46K (technically slightly less due to Rule # 5 below)
- Personal Backdoor Roth IRA: $7,000 (50+)
- Spousal Backdoor Roth IRA: $7,000 (50+)
- Total: $60K
Example Four
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: $13,500 employee contribution plus $6K (3% of salary) employer contribution: $19,500
- 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: $19,500
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 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.)
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. However, you could open a SEP-IRA for your self-employment income in March 2021 for tax year 2020, and then open an individual 401(k) in June 2021 for tax year 2021 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, HSAs, or DBPs
457(b)s, Backdoor Roth IRAs, HSAs, and defined benefit/cash balance plans 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 $57K 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 $6,500 catch up. That $6,500 catch-up is in addition to the $57K limit, so if you're over 50, you're self-employed with lots of income, and you make your full $26,000 employee contribution to your individual 401(k), the $57K limit becomes a $63,500K limit.
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 $19.5K into your 403(b) at work, you are only allowed to put $57K-$19.5K=$37.5K 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 $57K 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 $57K 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.
Help me understand example 4, because I am in a similar situation.
I am in small practice with 2 (not 1) other doctors, we have a SIMPLE IRA for ourselves and our employees
I make about 50K on the side for taking call at the hospital at which I am credentialed and receive a 1099.
Are these two part of a” controlled group”?
I am getting different responses on whether or not I can set up a solo 401k for the 50k earned from taking call in addition to contributing to the SIMPLE IRA from my practice.
If you own less than 80% of the practice then you do not form a controlled group. If you provided services as a 1099 to the same entity to which the practice provides services, this could be a potential issue (affiliated service group). Other than that, you can certainly open a solo 401k plan. However, your salary deferral to one would have to be coordinated with SIMPLE.
Thanks for the reply. I still do not understand your response in the context of Example 4, where the physician owned 50% of his practice, but still formed a controlled group with his 1099 consulting work.
I just spoke to an accountant who said there were different rules for a SIMPLE plan, and because I have a SIMPLE plan for my employees and myself for my practice, I could not contribute to a solo 401k with my 1099 work as an on-call physician (because the IRS says that an employer with a SIMPLE plan can only contribute to a SIMPLE plan ?). I am thoroughly confused.
The two businesses are related, so you can only have one plan between them. Since you already have a SIMPLE plan, you can’t now have a 401(k). At any rate, if it made sense for you to use a SIMPLE, you likely don’t qualify to use a solo 401(k).
So there are two things at work here. One is that if you have a controlled group, then you can only practically have a single plan (you can have two, but they have to be tested together, which limits the utility of using two plans). It seems to me that you do not form a controlled group here, so you can do a solo 401k plan on the side.
And two, if you have a SIMPLE, your 401k contribution (employee) will have to be coordinated with the SIMPLE, so you can do the rest of the 401k deferral ($19k-$13k), and profit sharing into the solo 401k plan.
I also have to correct myself, it is 80% or more of both businesses, not just your practice (so you currently own 100% of your solo proprietorship, but only a third of the practice, so you are fine).
Sorry, didn’t go back and read what the ownership situation was. I agree, not a controlled group so two plans okay.
How does one figure out their net income for their individual 401K prior to 12/31? (The post mentioned the deadline to put in the individual 401K contribution is 12/31).
I have been to 3 different accountants in the last 3 years (can’t find a good one), and they each had a different approach and different level of aggressiveness in taking deductions for my S corp. So I did not know my net income until after meeting with the accountant in order to file my business taxes in March…..this is well past the 12/31 deadline.
Also, in some years, the accountant has made the deductions exceed the income….creating an overall loss (that “flows on to the personal taxes”)….when there is an overall loss reported on the S corp, can you still make a 401K contribution?
Thanks!
S Corp K1 income doesn’t matter. It’s the wages that determine the allowed amount of profit sharing contribution – max is 25% of W2 Box 1 Compensation.
Employee deferral contributions for an S Corp employee must be withheld from payroll
Exactly? I don’t know of a way unless you magically know your exact income. But the EMPLOYER contribution can go in later. The EMPLOYEE contribution has to be in by the end of the year. Did you make $19K+ or not? If you did, then contribute the $19K employee contribution (assuming you haven’t used it elsewhere) and wait to make the employer contribution. If you didn’t make at least $19K, why are you bothering with an S Corp?
I received replies to my comment #227 to my personal email….they are not showing up here, but I will respond here.
So to expound on comment #227, this is my S corp where I collect various 1099 income from side jobs. There is no w2 or payroll, nor a K1…..I’m not that sophisticated!!
I do have a W2 job where I max out the employee contribution to the 401K.
So for the S corp, I would be doing the employer part of the contribution…..good to know I have until later to get that in….does that mean March 15th which is business tax deadline or April 15 which is personal tax deadline?
With regards to why I have an S corp, an accountant many years ago suggested I should have an S corp for all my 1099 income which varies a lot year to year…..last year it was about $20K, but it has been much higher in years past. I never bothered closing it, and frankly wouldn’t know how. Most accountants say it is useful to have as you can take more deductions on it, and if you create a loss, “that loss flows onto the personal.”
Thanks
an S Corp isn’t just some no big deal status, it’s a proper corporation, files it’s own corporate return, and if you’re performing professional services and collecting income paid to your Corp and not taking salary you’re making a mistake that could come back to haunt you
If your Corp files a tax return (I hope it does) then you have a K-1.
You can do an extension for both, so it’s actually Sep 15th.
I disagree with your accountant’s recommendation to form an S Corp for “any 1099 income”, but I bet it has been profitable for him/her over the years to spend a 4 figure annual amount on 941s and corporate returns for a $20K business. You really can’t take more deductions on an S corp than a sole proprietor for the typical doc.
M wrote: “There is no w2 or payroll, nor a K1…” and “So for the S corp, I would be doing the employer part of the contribution”
You have to pay yourself w2 wages from your S corp in order to make a profit sharing contribution to your solo(k). The w2 wages qualify as plan compensation. Your profit sharing contribution equals 25% of your w2 wages from your S corp. If your w2 wages are $0, your profit sharing contribution is $0.
Thanks for all the advice.
I looked back at my 2018 tax return…I do have a K1….sorry still learning all these terms….I don’t know how to convert that 1099 income to W2 income as Jeremy Palm suggests…..does the accountant do that?
Yes I do have an accountant file personal and corporate returns every year….I just can’t seem to find a good and knowledgeable accountant!
Apparently I never needed an S corp either.
Can anyone recommend a good accountant in NYC (ideally Manhattan, Queens, or Long Island)
Thanks!
Hi,
I am an independent contractor, I contract at 3-4 (although 2 main facilites).
Can I do a SoloK for each?
I realize I can only do one employee contribution of 19,000 for one.
But, can I contribute on the employer level for each?
TIA,
S
the income is lumped together and you just have one solo 401k
multiple plans would be no benefit
No, you have one business with two customers. One solo 401(k) with one $56K (for 2019) contribution limit.
I click your last item under “advanced” which has a title saying “150 Portfolios Better Than Yours” but it brings me here. What gives? I want to see good portfolios, not advice on multiple 401k’s! (Being Canadian, and a teacher rather than physician, they aren’t much good to me 😉
Got to your website while looking for WLI refutations so I can convince my friends they’re getting scammed. Love it!
Thanks for letting me know about the bad link. Will fix. Here’s the post you’re looking for:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
I looked back at my 2018 tax return…I do have a K1….sorry still learning all these terms….I don’t know how to convert that 1099 income to W2 income as Jeremy Palm suggests…..does the accountant do that?
Yes I do have an accountant file personal and corporate returns every year….I just can’t seem to find a good and knowledgeable accountant!
Apparently I never needed an S corp either.
Can anyone recommend a good accountant in NYC (ideally Manhattan, Queens, or Long Island)
Thanks!
Yes, it’s done when the S Corp pays you a salary on a W-2 as an employee of the S Corp.
M, ask your current (or your new) accountant if they offer payroll services. If so, they can help you run the payroll from your S-Corp.
Thanks Jeremy Palm!
The last few years my 1099 income to my S corp has only been approx. $20K or less as most of my time now is devoted to my W2 job and to my toddler. When the S corp was opened in 2011, I was making about $70-$80K per year on the S corp. At that point I did not know about White Coat Investor, and just let the accountant I had at the time do whatever he thought was right…..I think at least part of the reason he opened up the S corp was to charge me for an extra tax return, quarterly estimated taxes, etc.
He and other accountants since him have said you can take more deductions on the S corp (license, conferences, meals, home office, car, etc.) which sometimes creates enough of a loss that you can deduct on your personal return. Is this an incorrect approach?
Is this payroll/W2 required for the S corp?
I imagine the accountant will charge me extra for that, and that’s not worth it with only $20K of income.
If it is required, is it something I can do myself with Turbo Tax?
you simply need to dissolve the S corp.
I would immediately instruct whoever is paying you 1099 income to start doing so to you personally and not your S corp. If your S corp receives no income in 2020 you can probably finish 2019 as a final return for the Corp. Maybe. I’m no CPA or lawyer.
An S corp for $20k income is a waste of money (accounting costs, payroll) and a hassle. Especially post TCJA with consideration of the QBI deduction.
You can take all those deductions as a sole proprietor. The S Corp is about saving on payroll (mostly Medicare) tax on part of your income.
Yes, payroll/W-2 is required for an S Corp.
I do my own payroll, but not sure I’d recommend the process to others.
Curious if Im understanding this correctly. Single male with 2 sources of income (W2 from ER group, 10-99 from unrelated ER group in different state)
– $6k backdoor roth Conversion
– $3.5k HSA account
– Employer #1 ER group pays a W-2 of $100k salary with $10k employee 401k contribution taken from my paycheck (could have maxed this out to $19k but didn’t, but can’t contribute more at this point)
**Thus in the above accounts I have $19.5k contributed**
– Employer #2 is 10-99 Independent Contractor with different hospital in different state that pays my LLC (taxed as an S-corp), $280k annual earnings. For my 2nd 401k I opened Fidelity solo 401k…. but I don’t know what is the max I can contribute…
How much can Nic put in to the solo 401k?
a) (19k employeE) + (37k employeR) = 56k total
b) (19k-10k = 9k employeE) +(37k employeR) = 46k total
c) (19k-10k = 9k employeE) + (56k-9k = 47k employeR) = 56k total
“A” would put me over the employee total contribution limit of 19k… so really I don’t know if “B” or “C” is correct… I’m hoping its “C”. Please let me know!
you should start a thread in the forum for this, it’s much easier to work through there
your S Corp makes things much more complex, what are your S Corp W2 wages?
HSA and IRA contributions are no factor and can be ignored
c) for 2019.
Congratulations! You win! (But you should have put more in that other 401k). You could have put $19K in there and another $56K as an employer contribution into your solo 401(k), assuming you made enough, which I think you did. You certainly earned enough to do a $47K employer contribution.
this may be correct, but depends on the S Corp wages, income taken as distributions are excluded from calculations, and employee deferral has to be from funds not already received, and since 2019 is over….
You’re right. I missed the S Corp. Not sure I would have gotten an S Corp with that low of an income. We need more info…i.e. how much you paid yourself in wages.
sorry here are more details to help round out the picture. It is a pLLC for my physician services but taxed as an S-Corp. I tried to simplify, but essentially I have 3 different Emergency Medicine gigs that pay a 10-99 independent contractor under the umbrella of this LLC. The largest of them was $280k (which I indicated), another was $86k, and the third was just about $21k. This year I paid myself from that LLC $290k… based on average salaries of EM physicians. I also have 3 real estate properties (one commercial, two residential rentals) that are associated with a second LLC for some (not-so-passive/kinda active, passive income). But i’m not sure that income matters here.
Perfect, that should be plenty of salary to make those contributions. So the advice I gave above should be fine. But you understand why Jacoavlu was pointing out why your S Corp salary matters right? If you’d only paid yourself $100K as salary, you couldn’t put as much into the i401k.
That rental income is passive unless you qualify for REPS, sorry.
The problem is that employee deferral amounts have to come from funds not already received by the employee, meaning they have to be withheld from payroll and then submitted by the Corp, and to be 2019 contributions have to come from payroll with a pay date on or before 12/31/19.
So the ship has already sailed for S Corp employee salary deferral for 2019.
Hi,
If I have 1099 income from multiple states that are contributed to an individual 401k, what is the appropriate way to file the contributions?
For example, if I had:
$30k from state A, tax rate 10%
$10k from state B, tax rate 1%
$10k from state C, tax rate 5%
Assuming my max contribution were $28,294 ($19k employee deferral, $9,294 employer contribution), would the contributions be deducted proportionally from each state’s income? (60% of the $28,294 from state A, 20% from state B, 20% from state C), or would I be able to preferentially defer the income from state A since it has the highest tax rate?
wasn’t this already answered for you in the forum?
No, I restated my question as I think it was misunderstood with my original phrasing. Trying to reach out hoping for more input.
I don’t know the answer. I bet you have to do it proportionally, but I’m not sure about that. It would certainly be beneficial to defer it all from the high tax state obviously and then pull it all out in a low tax state in retirement.
To clarify, my question is focused on the tax benefits of deferring income preferentially from states with higher income taxes.
To restate my question, if I made the following:
$30k from state A, tax rate 10%
$10k from state B, tax rate 1%
$10k from state C, tax rate 5%
Would I be able to defer only the income from state A toward an individual 401k(assuming a max contribution of less than $30k), or would I have to defer proportional amounts from each state A, B and C toward an individual 401k?
Here is my situation ( I am under 50 years of age)
2019: Our private group was contracted by hospital, we did our 401K (Max amount 57K) on our annual W2s
2020: We became hospital employees with 403b and 457 (I am putting away 19.5 K with hospital maxing it out to 57K). My money (19.5K) goes in 403b while the hospital puts money in 457 (Again to a combined 403b and 457 amount totaling 57K)
My questions is our old private group (total of 11 people) still is giving us income in 2020 (From account receivables from 2019) on W2. Can I use this money from my private group on a W2 to start a solo 401K?
If not can I do anything else to save on taxes?
The 457 limit ($19.5K) is completely separate from the 403b limit ($57K). So your hospital could be putting more money into the 403 if they wanted.
No, you can’t use W-2 money to start a solo 401(k). If they still let you use your old 401k, great, but you’re not self-employed so you can’t use a self-employed retirement plan.
I have 700K that I wanted to put in solo 401K, however I am told the third party administrator to make sure the plan is in compliance will cost annually around 1000. Do I need to do the TPA thing every year and is 1000 a typical cost? How do you guys set it up?
I don’t have a TPA for my solo 401(k).
You know there’s no way to contribute $700K to a solo 401(k) in one year, right? You can roll that much in there, but the max contribution is only $57K for those under 50.
The contribution to the 403b is still mine so employee. There is a nice employer contribution but I don’t have those numbers in front of me. I want to set things up correctly for 2020 , maybe best if I only put a little in the TSP..
I have been out of training for 2.5 years and working with a financial planner that I don’t trust and am now trying to get rid of. I have an S-Corp and he helped me set up an Individual 401K that I contribute to each month to hit the 19k per year, then I have been contributing about 30k at the end of the year from my S-Corp to my Single K.
I initially set up a Vanguard account and he was freaking out saying it is “not a qualified plan” and am now using his “qualified plan” which charges 1.10% and I have definitely paid more in fees than I have made over the last 2.5 years.
Is it easy to just move all my funds back into the Vanguard Single K I had set up 2.5 years ago, where I wont have the high fees? I have tried to leave him a few times and he scared me out of it each time.
Hope someone can help.
In general it is probably best to use one 401(k) in any given year. But there’s no reason you can’t use one at Vanguard. I had a Vanguard solo 401(k) for a long time. Presumably you closed it and rolled the assets into this one, no?
And of course a Vanguard solo 401(k) is a qualified plan. That’s just silly. But I don’t know that the “Vanguard account” you actually set up is a Vanguard solo 401(k). If it isn’t, moving your money from a 401(k) to there will involve taxes and penalties.
Yeah, I closed the Vanguard 401(K) and moved money over to AssetMark 401(K) where I am about even after over two years and with the 1%+ fees. The Vanguard one is a Solo 401 (k), but if it’s best to use one 401(k) in any given year, should I wait until 2021 to make the switch? Or could I tell my billing company now to make monthly contributions to Vanguard Solo 401(k) starting next month and move everything over from AssetMark to Vanguard now?
Thank you so much for the quick response!!! I love your website!
You’re even after 2019? That’s concerning.
I guess you could move it now. Sounds like you need a new advisor at a minimum, but I don’t know enough about you to know if you’re capable of doing all this on your own or not. Why not call the Vanguard small business division and chat with them. Might want to read this post too:
https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/
including the comments.
Hello,
My workplace allows me to take my retirement as a traditional or roth IRA. If I have already contributed to and transferred funds into a backdoor roth IRA at the maximum limit of $6000 for 2019 will I still be able to have a Roth IRA through my workplace? is the $6000 limit a maximum limit per individual irrespective of how it gets funded (i.e. backdoor vs employer based retirement)?
thanks,
Mary
You mean Roth 401(k)? Yes. You can put $19.5K + match into a Roth 401(k) AND $6K into a Roth IRA. Separate limits. Both higher if 50+.
I am 5% owner of an LLC taxed as a partnership. I receive Guaranteed Pay for my service and my distributive share of non-passive income via a K1 on Line 14, Code attributed to my SSN. The LLC has many employees and sponsors a safe harbor 401k plan in which I participate. I can make the maximum annual employee contribution and I receive a matching employer contribution. Total contributions to the LLC safe harbor 401k plan do not exceed the $57,000 415c Limit for 2020. I also have an Individual 401k which was set up in prior years when I had income Self Employment income as Sole Proprietor. As a sole proprietor I am the sponsor of that plan. Can I make an employer contribution to the Individual 401k, subject to income limitations to reach the maximum 415c amount taking into account the contributions made by the LLC? For example, I contribute $19,500 to the LLC plan, the LLC provides a match of $13,000 for a total of $32,500. Can I make an employer contribution to the Individual 401k plan since the K1 Line 14 Code A amount is self employment income? Given the $57,000 overall limit and the maximum contribution rate, that amount would be $24,500 for 2020. If I cannot use the Individual 401k for this purpose, is there some other type of retirement plan that I can use?
If you have income in the sole proprietorship, yes. But you can’t do it using the money you made in the partnership. And you can only use one employee contribution total.
You can use a Backdoor Roth IRA, an HSA, and a taxable account. Your partnership could also incorporate a defined benefit plan.
I have a client that owns a very small percentage in a partnership and gets about $190k in K1 each year as a guaranteed pymnt. Is he able to create a solo 401K or can he create another entity and have the K1 be pd to that entity and then create a solo 401k?
No, the 401(k) must be set up by the partnership. Each partner can’t set up their own.
And creating another entity, such as incorporating, doesn’t get you around that requirement. Although interestingly, it did allow you to apply for your own PPP forgiveable loan, which surprised me.
Hi,
I worked as a locums in the first 4 months of this year (1099 income of about 200K). I then joined a full time W2 job. My full time job offers a employer-funded 403b plan, to which we become eligible after working for 2 years. Given that I now have a full time job, I am not planning to do any locums or 1099 income jobs at this time. My questions is regarding the solo 401K in this case.
1. I open a solo 401K and contribute “employee” + “employer” part = approx 55K. This will save me on taxes from the 1099 income i earned earlier this year.
2. But what happens next year? I will still not be eligible for job’s 403b (not completed 2 years) — can I continue the “employee” AND “employer” contributions in this solo 401K? Basically the question being, can I have a solo 401K account even-though I will be on a W2 job and not an independent contractor anymore? If not, then what are my options?
Thanks!
Ok trying to understand this as a resident
I recently graduated
I’m starting an urgent care job that has an employer 401k without a match. I should contribute $19.5k into there?
I’m doing hospitalist work as a 1099 independent contractor on the side so I should open a separate 401k and contribute 20% of my income?
None offer any 403b or anything.
I also want to do some telemedicine as an independent contractor on the side so I guess I can open a whole other 401k for that or should I just tag on to the other 401k I do for my hospitalist job?
Am I missing anything else?
Thanks a lot
Yes.
Yes.
No, you only get two 401(k)s. That 1099 hospitalist gig and that 1099 telemedicine gig is all considered one job.
Varun, the reason the 1099 hospitalist gig and the IC telemedicine gig are considered “one job” for the purposes of the 401k is because you are the owner of both businesses providing the service. And this is to avoid people exploiting a loophole and creating multiple businesses to stash away money in multiple 401k’s.
Best,
PFB
Hi, I already have money in my Traditional IRA, contributed in 2017, 2018, and 2019. If I want to start with a Backdoor Roth this year or next, let’s say Jan 2 2021, should I have to move that previous balance first?
If it is mostly after-tax money, I would just convert it all to the Roth IRA, paying any taxes due on earnings at your ordinary income tax rates. If it is all pre-tax money, you may wish to roll it into your 401(k), saving the taxes you would pay on a conversion but still eliminating those dollars from the pro-rata calculation required by line 6 of IRS form 8606. You can obviously do a Backdoor Roth IRA for 2020 until tax day in 2021, but better to do it during the calendar year.
Thanks! Would it be best to convert the current Traditional IRA balance to a Roth this year, 2020, to get the Traditional to zero balance… and then start w setting up the Backdoor Roth in 2021 (Jan 2)?
I would convert ASAP.
My employer 401k gives the option to contribute to either pre-tax deferral or Roth 401k. Which is better?
Unfortunately, this question can relatively complex. The rule of thumb is to use tax-deferred contributions in your peak earnings years and Roth contributions in all other years, but there are exceptions.
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
Thanks for the article update, this is always a confusing topic for me.
Currently a W2 employee of a practice (401k/psp) and receive 1099 misc call income from the hospital (set up non prototype solo 401k). I have been able to max out employee contributions in the 401k plus match through my w2 job, and then contribute 20% of profit to pretax individual 401k, and use voluntary non roth contributions and do in plan roth conversions. This has worked well, however life changes.
I am contemplating setting up my own practice, in which I would have 1 employee. The practice would likely incorporate as an LLC taxed as an S corp. I am uncertain to how offering retirement plan at my new practice will effect my ability to keep my solo401k for 1099 misc call income generated.
If I didn’t offer retirement plan at work could I still utilize the 1099 income for employee and employer contributions?
If I do offer a retirement plan at work would the 1099 misc be considered a controlled group?
Thanks for your help
Once you hire an employee, unless your plan has included provisions such as 1 year eligibility period, your employee would be immediately eligible (for a less than optimal arrangement, in most cases), so I would check on that first. If your current document has 1 year eligibility, then you will have time to set up an ERISA 401k for the practice. You do not want to maintain a solo 401k and an ERISA 401k at the same time since you form a controlled group and you won’t be able to have two separate plans with two separate limits (they would have a single limit, so it would not be economical to have both). And no, you can not have a 1099 plan even if you have no plan for the practice, that wouldn’t work due to the same controlled group rules, one entity – one plan.
However, you can have your income from your 1099 sources go to your practice, and you can potentially max out the 401k with profit sharing and/or set up a Cash Balance plan if your income is high enough (and you are old enough to benefit from it). So it would be a win-win.
You won’t be able to do so. Sorry. The businesses will be related as you’ll own both. 1 401(k) total in that situation and you’ll have to offer it to your employee.
thanks Jim great article and wonderful reminder regarding the 403b rule. I myself have a 403b at work which I max out, making my solo 401k contribution max I can give would be 37.5K.
I always get slightly different numbers whenever I calculate the solo 401k contribution however. Just doing 20% of my 1099 income gets me one number, using the earned income minus half self employment tax get me another, Mike Piper’s solo 401k gives another, and finally my account gets another. What gives??? In the end I just use my accountant’s number, and even though the numbers are near each other they are sometimes up to 1K off. Does this solo 401k contribution fall under scrutiny a lot? My accountant mentions not to sweat it but did want to get another opinion.
Yes! Same here. And I use the same online calculator, lol. Let’s see what Jim says.
This is the most accurate calculator that I know of.
https://thefinancebuff.com/solo-401k-for-part-time-self-employment.html
That might be interesting academically to find the answer, but I think you’re likely doing the right thing letting your accountant calculate it for you. No, it doesn’t come under scrutiny a lot.
If one has an S corp with about $20,000 of 1099 income, does one have to pay oneself a salary in order to contibute to the solo 401K?
If so, is it better to just dissolve the S corp and use Schedule C? Can one still do the solo 401K if you use Schedule C for the 1099 income?
Thanks
Yes.
Probably. The S Corp may provide some business liability asset protection though.
Yes, you can contribute to a solo 401(k) as a sole proprietor.
Ive max’d my 2020 401K w my employer, and now I’m starting a second job that has a 401K w match. How can I contribute to this second 401K without getting penalties?
You will have to have one of the two plans return the excess contributions and their growth:
https://www.investopedia.com/ask/answers/158.asp
With the employers i’ve dealt with they want both their W2 and the W2 from the other company to prove you had an excess contribution.
It is important to do this as quickly after you recieve your W2’s at the end of the year.
Every employer/plan’s process is slightly different.
They probably won’t let you contribute this year anyway, but if they do, you can’t make an employee contribution to it and they probably won’t give you an employer contribution to it without an employee contribution.
I’m slightly confused from comment #228 and the replies, particularly how it affects my current situation.
I am a partner in a group, which pays my PLLC on a K1. My PLLC pays me + distributions, and maximizes my 401k 19.5 + 37.5.
I traditionally do locums, bringing an extra ~125 per year. My plan was to create a new PLLC for locums, and take advantage of a second 401k, contributing 20% of net earnings with a max of 57k.
After reading comment #228 and replies I’m confused. Since its the same type of work (radiology), am I treated as one business with two customers? Or can I get away with it since one is a partner K1, and the other is 1099 locums?
Side questions, my main PLLC pays me through payroll + distributions. Is it necessary for my side gig to also set up payroll?? Or can I just pass it through as a distribution? Want to avoid the recurring payroll processing fee
Thanks in advance
Your PLLC must use the partnership 401(k). If there is no partnership 401(k), you cannot contribute to one with that income.
The second 401(k) could be used for your locums money. No new for a PLLC that I can see though unless your state requires it. I’d just do a sole proprietorship.
If you did set up another PLLC, payroll would also have to be done. Distributions are not eligible to go into retirement plans.
Thanks, that makes sense. The group has an advisor who offers a 401k which I have been using, but in order to save on his fees I was planning on transferring it to Schwab however will still need to comply with group 401k rules, so I believe I’ll still be ok (need to provide my 401k info yearly to the group’s person for compliance, etc).
Perfect, that saves me the legal zoom fee AND the payroll fee. To my understanding, in FL a sole proprietorship doesn’t need to register anything if I use my own name. However in some googling it seems I would still need an EIN since I will be providing a 401k for myself. Sound about right?
Thanks for all the invaluable information
EINs are fast and free.
I currently have two jobs. My full time job is a W2 and I have a 401k that gets maxed out at 56k.
I have another job where I am paid on a 1099. Am I able to contribute to a Keogh with that 1099 money? I’m trying to figure out what to do with this money.
Yes.
But I’d use a solo 401(k) so you can still do a Backdoor Roth IRA.
I can’t do a backdoor roth with a Keogh? I was under the impression I could
I think you’re right. I think you can. Keep in mind almost no one uses that word/account anymore. I mean, the IRS talks about it but a Google search doesn’t really reveal anyone you’ve heard of offering an account called a Keogh.
I should correct myself. I just realized that Fidelity actually labels their individual 401ks as Keogh for some reason. So I it is actually a solo 401k. Now I just need to figure out what percentage of that 1099 income I can legally invest in it?
yeah dude see my comment #245 above and the responses- seems to be around 20% of your 1099 income.
and yes I got confused as well with Fidelity calling their solo 401K a “keogh”. I guess they just wanted a throwback to an old school term. that or some dude at Fidelity is laughing his ass off at all the confused investors with 1099 income!
If a sole proprietor, it works out to 20% of net self employment income. If an S Corp, it works out to 25% of salary/wages paid.
In example one, it seems like the suggestion is to contribute a total of $26,500 in 401(k) employee contributions. Wouldn’t that be over the limit of $19,500? Seems to me since the physician is only 42 and rule #1 states that the number of unrelated employers doesn’t affect the limit that this would be $7,000 too high?
I’m confused (or more likely, you are). Here’s what I wrote:
Where does that say $26,500 in 401(k) employee contributions?