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 $58K limit in 2021 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 2021 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 – $58K per Unrelated Employer
The IRS also only allows you and your employer (which might also be you) to put a total of $58,000 for 2021 ($64,000 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:
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 $7.5K into either hospital's 401(k) (pick the one with the better investments)
- Plus $6,000 into a Backdoor Roth IRA
- Total: $53,500
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: $7,200
- Total: $163,200 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 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).
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 $58K 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 $58K 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 $58K limit becomes a $64,500K 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 $58K-$19.5K=$38.5K 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 $58K 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.
The information here is terrific. Can’t say that enough.
I have a solo 401k from consulting side-gig and my W2 employer is flexible with how I’m paid (small company). I don’t have majority equity / control in the company of my W2 employer.
Could my employer contribute the entire $57k amount (2020 limit) into my employer 401k without any contributions from me? I’m assuming that these would be a non-elective contribution. Any reason why this wouldn’t be allowed?
If it passes the required tests, yes, as a profit-sharing contribution. Basically it depends on the make-up of the company and how much all those folks are contributing. If there are a bunch of poorly paid folks who put nothing in the 401(k) in the company, the maximum that can be put in for you will be limited, sometimes quite severely. The idea is that a 401(k) cannot just enrich the highly paid employees and owners.
As WCI above said, this can be done only if the demographics of the company are favorable, and only with an appropriately set W2 (which again will depend on the aforementioned demographics). But if the company is run by mostly partners, then this arrangement would be possible. You will need to speak with the TPA who administers the plan, and they should have more insight into whether this will be possible at all.
Also, this would be ‘company’ contribution, also known as profit-sharing only type contribution. Definitely not a non-elective contribution since the company can choose whether to make it or not. And also this would have to come from your net earnings from the company, so at the very least the TPA would have to do an illustration to see how it would be possible to accomplish even if demographics is favorable.
Question about 457b and solo 401k contribution from same source:
I just started a job where I received a W-2 salary every two weeks, but also have quarterly payouts from the hospital for call pay as a 1099. Luckily the quarterly payouts are associated with a 457b that the hospital offers. With the amount of call I take, the $19500 max 457b contribution limit is quickly reached within a short period in just one quarter. I currently don’t have access to a 401k at the salaried W-2 job (pension plan available after one year of employment). I am wondering if I can use the left over amount from the 1099 call pay to make employee contributions in a solo 401k even though it is the same source used to max out the 457b?
It’s a little confusing. If you’re paid on a 1099, you’re not an employee for the hospital and shouldn’t be allowed to use their 457b with that money. Are you sure you’re not funding that with your W-2 money? That’s all squirrelly and waiting for an audit it seems to me.
Typically you can use a solo 401(k) for 1099 money, but it’s not quite clear what is going on here. The IRS may reclassify you as an employee, not an independent contractor, in which case you couldn’t use a solo 401(k).
Sometimes plans allow 1099s to participate. This can easily be found in the SPD or an enrollment booklet or by calling the plan provider. I’ll need to find out whether someone with a 1099 can double dip and set up a solo 401k plan in addition to an employer plan.
That’s interesting. First time I’ve heard that.
In most cases you want to exclude 1099s but the hospital can make a decision to include them in their retirement plan just to offer a benefit, it is entirely up to them. Plan document has an option to include 1099s, and from time to time I see this option available.
Only for 457s or for 403b/401ks too?
It’s complicated, but in a nutshell, 403b don’t allow 1099s and 457s that are governmental also don’t allow 1099s (other 457s do allow), while 401ks allow 1099s.
That is complicated. No rhyme or reason to some of these rules.
So it looks like you can have a solo 401k as well in place, so you can do $19.5k x 2 plus PS into 457 plus solo 401k. I don’t know of anything that would prevent one from setting up a solo 401k since presumably you can have a 401k and a 457 at the same time.
Yes, it’s a nice benefit the hospital offers to physicians that take call whether they are employees or not. My W-2 income is paid by a multispeciality organization that is separate.
I may be leaving my current practice which I am getting paid on a w2 and joining another practice that is offering me partnership. However, I am not eligible to contribute to a 401k until the second year I am there. The transition from my current practice to the new practice would be over 6-12 months. IF my current employer is still willing to let me stay on their 401k plan for 2021, would it be wise to have my new employer pay me as a 1099 so I can contribute to a solo 401K for 2021? I already have a solo 401k for my consulting so would it be possible to have:
1) 401k from my current employer (19,500 + 4% match)
2) Solo 401k from consulting
3) Solo 401 as an IC for just the 1st year at my new practice
Thanks!
If they pay you as a 1099 isn’t that going to put off your ability to contribute to their 401(k) yet another year? And why would you be able to contribute to a 401(k) after you have left the employer offering it? That doesn’t make any sense. Obviously you can max it out for the year before you leave an employer if you leave at mid year. Maybe that’s what you mean.
But if you can’t put all the money you want to save for retirement into a retirement account, just invest it in a taxable account. You might also consider using it for another use like buying a Tesla or paying off your mortgage.
Sorry I wasn’t clear in my question.
1) I will be leaving my current employer but it will be a slow transition over 3-6 months since he’ll need time to find a replacement. I’m hoping I could still max out my 401k with my current employer for 2021
2) I was referring to working as an IC for my new employer since I won’t be eligible for their 401k until 2022
1. Probably.
2. I understand that, but if you’re an IC in 2021 and then become an employee, you may not become eligible for the 401(k) until 2023.
Ah, good point. I’ll have to confirm with their HR but you’re most likely right. Thanks
I will finish my residency in 2021 and will change employers in the middle of the year.
My current employer has a 403b with pretax/roth options and no match, but I have the option of After-Tax contributions with in plan conversion to Roth. The new employer will have a 403b with a match, and no After-Tax/Mega Roth contributions (have not yet determined exactly where I am headed, but all have this).
My plan was to contribute After-Tax dollars up to the max allowed by my current employer (I think this will be about $30,000 for the time I am employed by them in 2021)and then to contribute to the 403b pretax at my new employer for the remainder of the year (for the 19500 + match). I tried to ask Fidelity if there was anything problematic about this, and they were not particularly helpful.
Does my plan make sense? Would I be limited to $57,000 between both of these 403bs or would the limit be $57,000 per plan as long as I personally do not contribute more than 19500 in total between the two in the pretax/roth category and the total per plan does not exceed $57,000?
Did you ask the potential employers if you can contribute for 2021? I bet you can’t.
But if you can, then no, the $57K limit generally does not apply to 401(k)s. The $19.5K in employee contributions does of course. I guess the question is whether two 403bs (along with Solo 401(k)s and SEP-IRAs) count toward the same $57K limit and as per Rule # 8 in the post, they very well may. But it probably doesn’t matter because you probably can’t contribute to the new one during your first six months anyway.
Lots of Roth the year you leave residency is usually a good idea, so I like where you’re going, but you need to talk to the new employer HR before you go too far down this road. Chances are the only plan you’ll be using in 2021 is the residency one and a Backdoor Roth IRA. That’s probably fine, I bet you have tons of other great uses for money this year.
Do 401a accounts count towards the $57k limit? My hospital W2 employer gives me a match to a 403b via the 401a. I also have a 457b but see that the contribution there does not count. Thank you!
I think it does, but it’s definitely a confusing area. More info here:
https://www.whitecoatinvestor.com/401-a/
Dear WCI:
I have been reading your blog for a long time and thank you for all of your service to the personal finance community.
I have a situation where I need to try to minimize taxes with both W2 and S corp income. I put this question up on BH and received a reply from Spirit Rider that I found puzzling so if you can take a look at that as well.
I am an employee of a health system and get paid as a W2. I also have a side private practice that has a solo 401K with Fidelity. The income from the side practice was minimal in the past but for 2020, it has grown somewhat and I need to figure out how to minimize my tax liability. Fed tax rate will be 37%.
Employee job:
I get paid as a W2 and I have both a 403b and a 457b. I max out the contributions for both.
S401K job:
It is an S corp and although it is the same industry (health care), it is a completely separate company. I own the company entirely but the income in the past years has been around 20-30K. I contributed 20% of the profit as an employER contribution in the past (so 5-6K).
For year 2020, I anticipate the S corp profit to be 50-60K.
Now,
I put 19.5K into my 403B. My W2 employER also matched about 11K this year. So I have $30.5K into the 403B with employee and employER contributions.
I put 19.5K into my 457B but my understanding is this does not count into the 57K limit for employee and employer contributions.
I plan to put about 12K (60K * 0.2) into my S401K as an employER contribution.
Can I put any employEE contribution into my s401K for myself? I have never done this in the past. For example, if the entire limit is 57K for employee and employer contributions, can I contribute this amount?
57K – (30.5K from W2 job) – (12K from employER s401k) = 14.5K
Any other suggestions on what I can do? Thank you.
A user named Spirit Rider responded:
“Also, a 403b is considered controlled by the participant. A 403b (employee – employer) annually additions must be aggregated with the annual additions of any employer retirement plan contributions or any business > 50% owned by the 403b participant.
Bottom Line: So not only can you not make a one-participant 401k employee deferral as pointed out by @Duckie. Your maximum one-participant 401k employer contributions are limited to $57K – $19.5K – $11K = $26.5K no matter much your calculated contributions are in the future.
Not to mention, an S-Corp’s 2% shareholder-employee’s employer contribution is limited to 25% of their W-2 Box 1 wages. None of the distribution can be the basis for employer contributions.
It appears you might have made a serious 401k plan error by partially misapplying a self-employed individual’s maximum employer contribution calculation. This could be a real mess to clean up.
Finally, if your primary W-2 employment W-2 Box 3 Social Security SS wages is > the SS MTE (2020 = $137,709). You should never have adopted the S-Corp in the first place. It is counter-productive and will cause you to pay more in FICA taxes than you would have paid in SE taxes as a sole proprietor.”
I understand his comment about the S Corp not being optimal. But if I have a separate S corp, why is it an error to contribute 20% employER contribution even if I have maxed out my 403B employEE match and received a match from the W2 employER?
In my experience SpiritRider is usually correct, so keep that in mind.
No, you cannot make employEE contributions to your solo 401(k). You’ve already used your $19.5K employEE contributions in the 403b.
For an S Corp, it isn’t 20% of profit for the business. It’s 25% of what you paid yourself as wages. Now if you pay yourself all $50-60K (minus the employer 401(k) contribution) as wages, then it’s all the same. But it kind of defeats the purpose of an S Corp (to save Medicare tax). To make matters worse, since you’re an employee of both businesses, both businesses have to withhold Social Security taxes. You can apply to get your overpaid employee Social Security taxes back, but your S Corp can’t get its share back and you get no benefit for it in your future Social Security benefits. It’s just gone.
I’m not sure who advised you to use an S Corp in your situation, but I think it was probably a mistake. In my experience, if a doc can’t get at least a 6 figure distribution out of the deal (saving something like $2200 in Medicare taxes) forming an s Corp probably isn’t worth it.
WCI,
Thanks for the reply. It looks like I made a huge mistake(s). I have contributed to my s401K for the last 3 years despite not being paid a salary from my S corp. I thought the employER contribution could come from profits only. I need to correct his mess.
1. Have you ever heard of someone who was in this situation before?
2. Who should I contact first to clear this up. Is it my s401k administrator or the IRS?
JPM
What a mess.
1) Not this specific one.
2) I think I’d start with an accountant. I wonder how much of it can be cleared up by refiling and claiming more salary. Also look into changing the tax-deferred contributions into after-tax contributions Mega Backdoor Roth IRA style. Maybe that could clear up the over contributions.
Honestly though, I don’t think very many people, including those who work at the IRS, understand all these rules. It wouldn’t surprise me at all if no one noticed. Obviously quit doing it but it’s already been three years since you did it the first time and nobody caught it that time.
Hi WCI,
First time doing solo401k (sole proprietor) and regular backdoor roth here. I apologize for asking so many questions—I just want to make sure I do it right.
1) When should I make employER contribution? How do I calculate the amount I can contribute—Total 1099 income – expenses – 1/2 self-employment tax? How do I know what the self-employment tax is? Is it okay to contribute in 2021 before April tax day? I don’t know what is my profit from my side gig— I usually just wait for my accountant to calculate it after the deduction. Any tips?
2) Which line on the tax form I can check for the following: (i) $19,500 pretax employEE contribution from my W2 and 1099. (ii) employER contribution. (Note: I didn’t max out my 401k from my W2 because their stock options are limited, so I contributed ~$14000 to my W2 401k and the rest to my solo401k employEE contribution)
3) I learned that my accountant did not deduct 1/2 of my self-employment tax last year. How can I know if my accountant do it this year? Is there anywhere from the tax form I can check? I usually just list my expenses for my accountant. Any advice?
4) I know there is a backdoor Roth tutorial link somewhere. Can someone send it to me again or tell me which line I need to pay attention to?
5) Optional: How does tax harvest work?
Thank you so much for all your help and Happy holidays!!
1. As soon as you can to give it more time to compound.
Yes.
Your tax software can calculate it or you can do it by hand. It’s 12.4% of first $142,900 of earned income for 2021 as SS tax and 2.9% of all earned income as Medicare tax.
Yes. It’s fine to wait until you know. That’s what I do now that I can’t max out my partnership plan.
2.i It generally shows up on your W-2 and doesn’t show up in your total income if from your employer. If from your sole proprietorship it goes on line 15 of Schedule 1 of Form 1040.
2.ii Either doesn’t show up if it is from your employer or if it is from your sole proprietorship it goes on line 15 of Schedule 1 of Form 1040.
3. That would be very odd. Are you sure? The tax software any accountant uses should do it automatically. But look at Schedule SE and line 14 of Schedule 1 of Form 1040.
4. https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/ Pay special attention to lines 15c and 18 on Form 8606
5. https://www.whitecoatinvestor.com/tax-loss-harvesting/
Thank you so much for your quick reply!!
1) I don’t see any Schedule SE in my 2019 tax folder. I only have 1040, Schedule 1, Schedule C, Schedule A and Schedule CA Form 540. I checked my 2019 Schedule 1 line 14: Deductible part of self-employment tax: blank. I started my side gig last year around November or December and only made $8100. I think I had loss after all the expense deductions. I definitely earn much more in 2020 from my side gig. It’s probably too late for me to do anything about 2019 but I want to make sure my accountant does not make any mistake again. Otherwise, I would need to find a new one lol 😂 it doesn’t seem like she knows a lot about backdoor Roth or side gig.
2) It’s 12.4% of first $142,900 of earned income for 2021 as SS tax and 2.9% of all earned income as Medicare tax. For clarification, earned income means before tax or after tax? Is it correct that the max I can get for SS tax would be $8,859.8 (12.4% x $142,900 x 1/2) even if we make more than $142,900? I assume we can’t get any deduction for Medicare tax since it’s not SS tax.
3) For both employEE and employER contribution from my solo401k would go on line 15 of Schedule 1. How does IRS know it’s pre-tax and whether it’s employEE or employER contribution? When I send check to Fidelity, I just need to make sure it’s employEE or employER, right?
Thank you so much for your help!! I appreciate it!
1) If you didn’t make any money, then you don’t owe any taxes so you don’t need a tax form. It doesn’t sound to me like your accountant made an error at all. I bet you’ll have one for 2020 though.
2) Earned income is before tax. Sorry, I said $142,900 above but it’s really $142,800. I don’t know what you mean the “max you can get for SS tax”. You pay 6.2% as the employee. Your employer pays 6.2%. The employer’s cost is deductible. But you only have to pay SS tax on your first $142,800 in 2021. Note that if you have two W-2 jobs, you’ll pay it on your first $142,800 at each job, but can get the extra paid back to you at tax time. Your employer can’t get their half back though. Medicare tax paid by an employer is also a deduction.
3) You don’t put it there if it isn’t pre-tax. For most self-employed, you just keep track what is employee and employer yourself. Fidelity doesn’t care. They only care what is pre-tax, post-tax, and Roth.
P.S. You’re paying an accountant hundreds of dollars a year to answer questions like these for you. Make sure you’re getting your money’s worth.
Will do!! Thank you so much for all your help!!
Most of the time – we are talking about maximizing contributions on here but I have a sudden need for cash for a business opportunity.
The 401K loan limit from my understanding is ‘per related employer’ up to 50K – by having multiple 401k’s going simultaneously (one from current employer + one personally owned business) allow me to pull a 50K loan from each?
I think so.
Am I contributing over the limit?
Annual pre-tax contributions:
$17k into 401(a) (employer contribution)
$19.5k into 403(b)
$19.5k into 457(b)
$8k into TSP (work part-time for federal government)
On top of this, considering taking part-time job that offers 401k – can I contribute to this as well or am I over the max?
Thank you for any help you can provide!
You can have multiple 401ks, but you still only get a $19.5K employee contribution. It looks to me like you used $19.5K in your 403(b), so I don’t see how you could also contribute $8K into your TSP as an employee contribution. I’m pretty sure that isn’t an employer contribution/match. Otherwise, everything looks fine. As far as your new job, if you’re actually eligible for the 401k as a part-time (you probably aren’t), you could only put in employer contributions there too since you already used up your $19.5K employee contribution in the 403b. The 401(a) and 457(b) have different/separate contribution limits.
WCI: Thank you – that is *immensely* helpful.
I remember reading the original WCI at the end of my residency a few years back, my mind was blown! This article did it again. A wise and wealthier family member attributed about 20-30% of their wealth just to being good with taxes so I am trying to emulate that and it’s never too early to plan for 2021.
Job #1:
I am a k1 partner in a large group. I can contribute up to 58K there including the 19500 employee bit per HR. This income is subject to self-employment taxes.
Job #1 401k: k1. $300,000 earned income projected. My plan permits me to do $19,500 as employee with remaining employer contribution to total $58,000. Ultimately I may earn less with all the covid uncertainty so I potentially can max out the 401k here it seems.
Job #2:
w2 at another hospital. They contribute unmatched a certain amount to a 401K as a employer contribution. Annual income $139,000.
Job #2 Employer contribution to 401K will be $15,028 which does not require that I make any contributions.
Job #3:
1099 for government contract job. No matching but does have a 401K. Subject to self-employment taxes.
Job #3 401k: 1099 earning $79,000. $79,000 * .2 = $15,800.
Total income before any deductions or anything else = $518K
Total 401k = $15800 + $15028 + $58000 = $88,828
Defined benefit through job#1 = $2,500 up to $30,000
Roth IRA backdoor = $6000
Spousal IRA backdoor = $6000
HSA = $3600
Am I missing anything? Is my overall income going to prohibit me from doing some of this stuff (with deductions probably will be a lot less as I will likely purchase a family vehicle for work (> 6000 lbs) to obtain the section 179/168 bonus depreciation).
Thanks for any and all comments!
That’s an awful lot just to taxes.
Looks pretty good. 3 401ks is a pretty rare situation, but I think you are following all the rules.
If you’re married or have a child the HSA contribution can be higher. And you can of course always save more in taxable.
Excellent thread.
I have several sources of income and I wonder if we are missing out on additional 401k opportunities.
Primary Job: W2. Max out 401k contribution every year (57K total including profit sharing component).
Partnership/Investor in a company (~10% “owner”): K1. ~50-60k per year income. Can I open a Solo 401k and contribute a portion of this income? If not, could I start LLC/Corp “investing company” and this company would receive the dividend payments which would then be paid to me? Just thinking of creative ideas here.
Lastly I work as a consultant: 1099-NEC. ~10k per year. Any opportunity to open an additional 401k for this?
In addition:
I max out my backdoor Roth IRA every year.
Traditional IRA for my wife is also maxed out (she had SEP I converted to Traditional IRA so I cannot do backdoor). Conversion of her Traditional IRA to Roth would result in ~28K of taxes.
All additional retirement money (around 200K+/year) is pumped into taxable account with TLH.
I do NOT have a high deductible insurance plan with a HSA.
Thank you for your time.
I am obviously very new to this.
I am looking at example 1 (the basics) and trying to understand Rule #1, which you mention: 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.
From the example 1:
Hospital 1 401(k): At least $5K (plus the $5K match) = $10K
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)
Would this not be an employee contribution of 5+7+6 = 18K + employer matches of 5+3.5 for a grand total of 26.5k ?
I am not sure how either the employee contribution of 18k or the total 26.5k would apply to the rule of 19.5 combined.
I guess I am confused?
Thanks
Good catch. When the article was originally written, the limit was $18K, not $19.5K. We failed to update that last $6K figure. Will fix.
Good catch. When the article was originally written, the limit was $18K, not $19.5K. We failed to update that last $6K figure. Will fix.
Glad I Could help, thank you for all you do!!!
I did scroll for a bit looking for an answer before asking this (likely basic) question, apologies if I missed a similar scenario that would have given me my answer.
Primary job is at the VA, yay TSP. Moonlight at an outside hospital where they offer a 403(b) with a modest match. I also do some moonlighting that is 1099.
VA salary is 240K, moonlight W2 is 20K and the 1099 work will probably be minimal, 2K or so (feeling burned out). I originally planned to contribute 26K to the TSP (I’m over 50), have all of my OSH W2 go directly into the 403(b) and was going to contribute the max to an individual 401(k). However, after reading this post and a few hundred comments, looks like my TSP contributions will be limited by whatever I put into the 403(b), so I would need to juggle my contributions to the 2 plans based on the matching amounts. Depressingly, it also looks like I’m limited to just the 2K into the individual 401(k) if that is all that I earned as a 1099, right?
Almost right. It would be $400 into an individual 401k.
Thank you! Now to find a side gig with access to 457 plan instead of a 403(b). First World problems…