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.
Is there a limit to the number of employers?
If not, hypothetically couldn’t you be hired by or create endless business entities (time & money allowing) that employ you and funnel 57K total per Unrelated Employer into a 401K.
Making things even more fun, if those dollars were all after-tax, then they could be rolled over to a Roth, right?
What is the most unrelated employers you have heard of WCI?
You could be hired by endless unrelated employers, however you could not create endless business entities. For businesses you have an ownership stake in there are ownership tests (brother/sister, parent/child,etc)
assuming one company doesn’t own another company, the main issue is brother sister with similiar owners. Note there are rules about effective ownership like having your spouse own a company, counts as you owning it.
if you are bored: https://www.irs.gov/pub/irs-tege/epchd704.pdf
That’s an interesting question because if you are an employee, in all cases you’ll be paid a W2. And you will have no control over the 401k plan. If you are the employer, your best bet is to be a 1099 (only one entity allowed) or a partnership (for multiple entities). So if you are a member of multiple partnerships, that’s definitely better, but you still don’t have full control over the 401k plans. Also, if partnerships have NHCE employees, after-tax will not work very well (unless there are very few NHCE employees). So once you start looking at this, I’d say 2-3 is maximum between 1099 and partnerships. I’m sure that there are some docs who might work as employees for multiple entities, possibly more than 2-3, but they would be W2 in most situations. I’ve seen cases where there are more than 2 entities, but in some of these cases we got affiliated service groups (which is yet another way in which multiple plans get shot down by IRS). So in practice 2 is common, 3 is uncommon unless one of the 3 is a W2 plan (so W2 employer 1, 1099 – 2, and possibly a partnership for employer 3). At some point docs just run out of time to do it all, and possibly 1 of the 3 is not significant income.
If you created them, they’re likely not unrelated. 2 is definitely more common, but 3 is possible. The issue is only the ones you create tend to make large employer contributions. So even if you work for two separate hospitals as a W-2 and you’re an IC too, their 401(k)s probably only offer a match so three $57K limits are almost impossible.
For example #3, if the 401k plan for the hospital offers in service withdrawals, is it possible for them to invest up to $37000 in after-tax 401k and roll it over to roth ira?
Yes. That’s called a Mega Backdoor Roth IRA.
https://www.whitecoatinvestor.com/the-mega-backdoor-roth-ira/
Similar to most of you, I didn’t take any accounting or business classes in high school or college, I was busy with Calculus & Biochem, only now do I wish I had taken at least one. So, I will offer up my situation “judgement/ advise” to the financial wizards:
-I’m a 47yo female physician,( married to a low income wage earner w/ no 401k, and have several dependents)
-I’m in the Army Reserve, so I already have a TSP (Thrift Saving’s Plan)- like 401k, no matching, max contribution $19.5K
-Have an S-Corp & set up an SEP-IRA= to which I have been contributing 20-25% of pre-tax earning
-My accountant said that the SEP + TSP contributions could not exceed the $57K annual limit, –so that’s what I’ve been doing. Is this TRUE?
– So, I recently joined a practice as a new part-time partner, they are offering a Traditional or Roth profit sharing 401k which states 1-20% contribution of guaranteed earnings (up to $57K) & that Roth contributions are limited to 19.5K for 2020.
– If I open the 401k with the new practice? How much can I contribute? How can I maximize my contributions overall?
Thank you!
No, it isn’t true. Your accountant is wrong.
You also should use a solo 401(k) instead of a SEP-IRA so you can do Backdoor Roth IRAs. The fact that your accountant didn’t tell you that is a fireable offense in my book. https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
You only get one $19.5K employEE contribution. If you use it in the TSP, you can’t use it in the new 401(k). But they could still put in a “match” or “employER” contribution if they are willing (they probably aren’t.)
I’m an internist and a priest. Perhaps a few years from retirement. I have a 401k and 457b through the hospital I work at and I max those out. I make very little as a priest, but enough that there is a pension fund opened (really nothing-it’s a token amount). The pension group, however offers a 403b. Is that something I can contribute to and how much? I’m 60.
Thanks
Depends on if you’re putting the full $19.5K into the 401(k). If so, then no.
I own 52% of an S-Corp, where I receive a W-2 and K-1, and max out the 401k. I also receive 1099 income from a separate business (100% owned by the 48% S-Corp owner) where I make a SEP contribution equal to about 18.587% of Net Profit (adjusting 20% for the half of FICA deduction). Instead of the SEP, could I open a Solo 401k for the 1099 income and have another $57k cap, while limiting total employee contributions in both plans to $19.5k?
It does not appear that you are a controlled group. And possibly not an affiliated service group, though more information would be needed to rule that out, specifically whether any relationship exists between S corp and the second entity such as use of offices, shared employees, billing, management, what services are performed, etc. If you are not an ASG, then you can open two separate plans with two separate limits, and the second plan can be an individual 401k.
I actually think that would work because you own just 52% of one company and 100% of your sole proprietorship (doesn’t matter who your client is). 52% is less than 80%, so you’re good to have two 401(k)s or a 401(k) and a SEP (although that would keep you from doing a Backdoor Roth IRA).
Hello:
Super helpful post and discussion. Could use some guidance on my situation.
Full time job – W2 with 403b maxed for 2020. I also completed backdoor Roth contributions for 2020.
Started an additional side gig in July 2020 – 1099 pay. Can I now open a SEP-IRA to invest from the 1099? Not sure as I have already completed a Roth contribution and there may be a conflict on which is done first.
Thanks in advance!
Hi Vishesh,
Congrats on the side-gig! You are right- the SEP IRA will cause the pro-rata rule to come into effect with the Backdoor Roth. So, a solo 401(k) would be a better choice.
Best,
PFB
Agreed. Be sure to read the 403b rule above.
You may find this post helpful too:
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
Hi Vishesh,
Congrats on the side-gig! You are right- the SEP IRA will cause the pro-rata rule to come into effect with the Backdoor Roth. So, a solo 401(k) would be a better choice.
Best,
PFB
Thanks for the prompt reply! Appreciate all the guidance.
Hi!
Thanks for all the articles on 401k vs SEP IRA. I am a fellow and do some moonlighting on the side for last few years but never knew about 401k so wanted some guidance
I make ~66k during fellowship (W2 / hospital #1and ~150k through moonlighting (sole proprietorship / 1099 / hospital #2).
I already maxed my 19.5k pre-tax contribution through hospital #1 . For more contribution, I am thinking of opening a Vanguard solo 401k as an employer (I dont have EIN so can use SSN per my accountant?). I am guessing that I cannot contribute any amount as an employee since I already maxed it out through my W2. But I can contribute ~20% of 150k or about 27k (using some calculators) as employer contribution to solo 401k. Is that correct?
You don’t need to cross post your comments if you just want me to see them. I see them all. Here’s the answer I gave on the other thread:
Get an EIN. Open a solo 401(k) (Vanguard is fine). Then put in $27K or so (use the calculators) as an employer contribution.
Hi everyone, first time doing i401k here and need some clarification on how to calculate employer contribution. Q1) What is the best way to calculate your “net earnings from self-employment”? I usually list all my expense out but my accountant doesn’t count all of them, which is frustrating. Q2) Do I have to do the employer contribution in 2020 or I can wait until 2021? Thank you for all your help!!
Income minus expenses including employer half of payroll taxes. Talk to the accountant so you understand why your accountant doesn’t count them. It should not be frustrating to be working with someone you’re paying.
You can make the employer contribution for 2020 in 2021.
Will do. My accountant says she doesn’t want to deduct too much or raise a red flag even though I have the receipts. I will definitely ask her again. Thank you!!
I’d get a new accountant if they’re costing you money that you deserve.
Hi WCI,
Thanks for writing this blog. Here is my case I changed company recently. My previous company we contributed 9,500$ to 401k pre-tax. They don’t offer after -tax (mega backdoor), no matching at all. My current company we are going to contributed 10,000$ (so we hit max 19,500$ for 401 k pre-tax for the year 2020). My current company also offer mega backdoor roth. We want to get max contribution to that.
So according to this blog can we contribute max to after tax 401k this year in my current company plan: 47,000$( 57,000 – 10,000) ? or 37,500 $ (57,000 -19,500) ?
We called to Fidelity but they said 2nd option (max 37,500$) even we pointed them to IRS link :(. They said does not matter my previous company and my current company is 2 companies different. 57K limit applies for every companies that I work/or used to work. 🙁
note : Both my companies do not offer match at all in 401k plan.
thank you so much,
$47K. Fidelity is wrong. Don’t even bother telling them what you contributed there other than to make sure only $10K is considered employee cpre-tax contribution. This all assumes the new company lets you contribute this year. Many don’t.