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.
Many thanks to opening my eyes as a newly graduated resident to saving not just working.
Job 1 = VA, TSP with 5% match (~8000)
Job 2 = Part time private hospital, offer a 401k but not contributing now
Job 3 = Contract work (upwards 100,000)
I was thinking of opening SEP by 4/15/15 to maximize this year’s taxes. As well as, starting the back door and stealth IRAs in 2015. Is this a good plan? My husband is a Doc as well, could we open a “brother/sister” company for the upcoming years? Or am I missing the difference in controlled vs uncontrolled? (which is possible.)
Thanks a bunch!
You don’t want a brother/sister company if you want more retirement accounts. You can do a SEP-IRA and then roll it into a solo 401(k) so you can do backdoor Roths.
As long as they don’t have non-spouse employees, they should be able to do a solo 401k plan, unless each of them own other companies with employees. If they are both W2 employees and have their own joint venture, they will most likely be ok. In any of these cases they should talk with someone do address their situation in detail.
At this point, if all they have are W2 jobs and various 1099 solo contractor jobs, they can even have employees (so then they’ll need a real 401k plan not solo).
Very intriguing ideas. My situation is as follows:
ER physician employed with large group, approximately 330k yearly. My company allows a total of $53k contributions to a 401k. I also work part time on an independent contractor basis for locums agency, making approximately $100k doing this. Married, age 44, wife does not work. Can I put any money from the locums job into a side 401k or other account? Any thoughts would be appreciated.
I believe that you can indeed open your own solo 401k plan for your 1099 income. You might even get your wife on the payroll if you do all of the formalities, and contribute even more.
Sure, you can probably put ~$20K as an employer contribution into an individual 401(k). Whether you can do the $18K employee contribution into that too is a bit grey. I do, but I can understand why others would not feel comfortable doing so.
If he makes an $18k deferral into another 401k plan, then I believe he can not do so for his solo 401k plan. But with a spouse employee, he can make an $18k deferral on top of the 20% contribution.
As long as the spouse is paid that much. But it’s not like a spousal IRA where you can make a contribution from your income.
Thank you very much for the edifying comments. However, I want to clarify something. What is the legal justification for making my wife an “employee” when she is not a physician and I am the only one earning an income in our family? Wouldn’t it be difficult to explain this if the IRS ever came knocking on my door? Also, just to make sure I understand, the potential solo 401k maximum income would still be $53,000, even if I made more than $260,000 in the locums 1099 job, right?
What do you mean by maximum income? The maximum contribution is $53K. That requires an income of ~$175K if you can use the $18K employee contribution or ~$270K if you can’t.
And yes, you can’t just call your spouse an employee. They have to actually be an employee and actually do some work.
It is not difficult, but you are right, you have to follow the proper process described here:
http://www.crossroadstax.com/blog/hiring-your-spouse-for-your-practice-make-sure-the-numbers-make-sense
Sorry, WCI, I meant to write “maximum contribution” rather than “maximum income.” Mr. Litovsky, thank you for your help as well.
I am a little confused about how you would designate employer vs employee money into a solo 401k.
At my main job (W-2 and partnership) I am able to put away 53k into a 401k. This is my employee contributions of 18k and then the remainder is match and profit sharing.
I also work for a locums company at a separate hospital and get paid on a 1099. So far this year I have made 25k that money is currently just sitting in a bank account untouched.
So my understanding is that I can set up a solo-401k since it is a separate employer and then I can put 20% of my income into that solo 401k. If I set up the solo-401k today how would I contribute the money I have in the bank account now (ie when I make the contribution how do i specify that it is employer money and not employee money since I have already hit the 18k cap on employee contributions).
I have the same question.
My main job is partnership that I get paid on a W2 and I am about 2% owner of the group that is an s-corp. I put in my own 18k to a 401k and then with profit sharing and match I hit 53k in the 401k each year.
The past year I have made 50k in moonlighting on a 1099. I called fidelity yesterday to set up the solo-401k and the guy on the phone said it sounded like I could not do a solo 401k because of the control group situation mentioned above.
I am also confused if I actually can set up a solo 401k and if I do – how I make sure the contributions are designated as the employer contribution and not the employee (since I already maxed the 18k employee).
Thanks!
Doesn’t sound like a controlled group to me.
Not sure how to designate employer contributions with Fidelity. It is very obvious with Vanguard, so it probably is with Fidelity. I can tell you this- no one seems to be looking at that too closely.
Thanks WCI!
After reading your “where to open your 401-k” I was planning on opening one with etrade but when I called to ask questions about setting up the solo 401k they seemed clueless. I was asking if I had to list an employer on the paperwork to open the account or if I just listed myself. He had no idea what I was talking about. Maybe I will just go with Vanguard.
I’ve been happy with my Vanguard plan, but be aware they don’t allow rollovers into the plan and you have to use the more expensive investor shares.
There are a lot of clueless people about this stuff at every company, including Vanguard.
I feel uniquely qualified to address your Etrade vs Vanguard issues given that I have an i401k at both places. Currently, I have my assets split equally between the two. I’m an Etrade “Elite” and Vanguard “Flagship” customer.
1. You have an equal chance of getting someone clueless on the phone when you call either institution. I recently opened a i401k at Vanguard. The process was frustrating. In contrast to their personal account representatives, the Small Business people were useless. In fact, I enlisted the help of my Flagship CFP rep to help and she was frustrated too. My questions weren’t that complicated! if you go with Vanguard, ask for supervisor, Steve Campo #36905 — you’ll save yourself a headache.
2. At Vanguard, you are limited to Vanguard Investor class funds. There is no brokerage option. All trades are commission free. As an Etrade Elite customer, you have access to the entire line of Vanguard mutual funds ADMIRAL class as well as the entire world of ETFs, stocks, options, etc. Trades are NOT commission free but my Elite rep gets them waived any time I call him and ask.
3. At Vanguard, you can only register/use one checking account for ACH deposits. So, if you want to do deposits to your i401k from you business checking account and deposits to your ROTH 401k from your personal account, tough luck. There is NO other way to make that deposit other than mail in a check . . . .not that a big deal for me cuz my Flagship rep sent me a stack of prepaid FedEx 2 day envelopes. Etrade allows you to register multiple checking accounts and use them in any way you like.
4. Etrade’s web interface is easier to use. Everything is on one site. With Vanguard, you have to use the Small Business site and the Personal site to accomplish everything.
So, the take home, you’ll be fine with either place. Forced to choose one: if you have a simple investment plan (no commodities, alternative funds, etc), are just starting out (i.e. account balance <$1000000) and don't mind the extra administrative hassle, I would go with Vanguard. If you have a larger account, fancier objectives, want less hassle, I would go with Etrade.
Not sure I understand what is going on with your # 3. I have certainly linked both the personal checking account to my personal Vanguard account and the business checking account to the Vanguard small business account.
Hmmm . . . . Do you have an i401k and a ROTH 401k? If so, how do you make contributions to your ROTH 401k account?
Vanguard only allows me to contribute to my ROTH 401k and i401K via Vanguard Small Business site. This site allows only ONE checking account to be linked. I prefer to make EMPLOYER contributions to my i401k account from my business checking. It follows that I like to make after tax, EMPLOYEE contributions to my ROTH 401k from my personal checking account.
Maybe you know something that the Vanguard phone reps and I don’t. How do I contribute to i401k and Roth 401k accounts using different checking accounts?
I have the Roth option on both my i401(k) and my partnership 401(k)/profit-sharing plan. Obviously, it’s $18K total Roth contributions if I ever choose to do that. At any rate, when you contribute online at the Vanguard small business site it allows you to choose employee/employer and Roth/traditional and it can all come out of your business account (or even your personal account.) I don’t see why you’d NEED to link 2 accounts. Just because you like to doesn’t mean you need to. In fact, I wouldn’t make any contributions to an i401(k) from a personal account. Think about how a regular 401(k) works- the employer withholds the money from your paycheck and sends it directly to the 401(k). Pretend you’re doing the same thing as the “employer.”
My 401k with my previous employer didn’t work that way for me. I would mail in a check for $14k, $15k or whatever the Roth contrib was at the end of the year because my last paycheck rarely had that amount as take home pay. Why, you may ask? I’m often unsure how much money will go to each until the end of the year, which, obviously, makes payroll deduction all that much more problematic. (i.e. I wish my take home was $24k in December).
Thanks for your input and for the work around/trick . . . .I’m sure there are others too!! I don’t “NEED” to link 2 accounts: it’s just easier that way. To use your example (if I understand correctly) I would still make the ROTH contrib using the VG site and my business account. I could “pretend” the money sent from my corporate account was my personal, after-tax money and then transfer the $$ from my personal account to my corporate account . . . .but why should I even have to do all that?!?! Is it my job to make things easier for Vanguard? Wouldn’t it just be easier to be able to do it directly from the Vanguard site . . . . .just like I can from Etrade.com? Maybe it’s my age but I guess I have higher service expectations (in other words, unrealistic) from my custodian.
FYI, I received a follow up email from my Vanguard Flagship rep who said the Small Business Site will be getting that feature “in the near future”. Apparently, I’m not the only guy out there that does things backwards.
That’s not true, there is no controlled group here. Yes, you can do a solo 401k and also you can do after-tax contribution so that you can contribute the entire $50k into the plan. It would have to be custom-designed plan document to allow that to happen though.
Never rely on the company to tell you what to contribute and what you can and can’t open. They are mostly clueless and are not supposed to provide tax advice (or any type of advice for that matter).
Within the account itself you should be able to distinguish between employee and employer contribution.
Would it be as “grey” if instead of an individual 401k, one utilized a SEP-IRA where 100% of the contribution is considered to be by the employer? That way you don’t have to worry about exceeding the $18k total max employee contribution to one or more retirement plans.
I’m a little lost. I’m not sure what you’re referring to as grey. But it’s relatively easy not to exceed the $18K limit. When I make contributions to my solo 401(k) I designate them either employee or employer contributions.
i am an ER doc, 1099 independent contractor,
490K made this year
contribute max to a sep ira 53K , and max to hsa 6500,
anything else i can do to put anymore money away ?
Personal and spousal backdoor Roth, taxable account, personal defined benefit plan.
Right, you’ll need to set up a Solo 401k together with a Solo Defined Benefit plan. Then roll the SEP into your solo 401k. You can open the solo 401k at Vanguard but you’ll need a custom plan document to allow rollovers and get you low cost Admiral shares. Then as WCI said, you can do the backdoor Roth.
As I recall, Vanguard’s individual 401(k) doesn’t allow rollovers. Most looking for that feature end up at Fidelity in my experience.
Now it does. Thanks to my TPA alerting me to one little known fact. I’m actually writing this up for Quantia MD as we speak (and if I have time I’ll give you a post on this). How to turn your Vanguard solo 401k into the best 401k in the world. You can get everything you want: incoming rollovers, outgoing rollovers, in-plan Roth conversions, Admiral shares, brokerage option, with a custom-designed plan document (that doesn’t cost much). Then all you do is open a pooled plan account at Vanguard (called VRIP), roll all of your traditional IRAs into it, and call it a day. We started doing this recently, and it works like a charm. After $250k in assets the TPA does the form 5500, and that’s it.
Cool, good to hear. I’m very interested in getting Admiral shares in mine. What will you set a pooled plan up for? (Bearing in mind it’s only going to save me $100 a year per $100K in the plan in lower ERs.)
By the way, you can also have a brokerage in yours as well, with Vanguard ETFs.
The TPA does this, I don’t deal with this personally (unless I’m asked to manage the assets). I think it is several hundred for the plan document and several hundred more to file form 5500 each year if more than $250k in assets. Nothing like the cost of doing a full blown pooled 401k plan, but the process is actually identical – same application. I’ll send you her price sheet for this. Very reasonable, and from what I understand very few TPAs do this at all.
Reasonable, but doesn’t make sense just to get admiral shares until that Individual 401(k) is $500K+ I would think.
For a 12 asset class portfolio, that’s exactly the number. However, don’t forget the ETFs. You can get an ETF portfolio that costs 0.1% for as little as the cost of each share! We never planned to sell this as a ‘product’ – rather we’ve had multiple requests for this feature, so the TPA found a way to make it worthwhile. The TPA services (annual 5500 reports) are not required until you break $250k (and you can file them yourself, but I wouldn’t do it to save a couple of bucks). Most importantly, you can consolidate your assets at Vanguard and you can add the incoming/outgoing rollovers. I don’t know if Fidelity allows outgoing rollovers, which is a requirement if you want to have in-plan Roth conversions. I’m not sure if you are aware of this, but you can convert any in-plan assets regardless of how old you are with the new IRS rule. This is the ultimate new Mega Roth strategy, but it is only possible if the plan document is created appropriately.
It’s a two page form: http://www.irs.gov/pub/irs-pdf/f5500ez.pdf The instructions are only 6 pages. As IRS forms go, that one is hardly intimidating. Seems like a pretty quick way to save $250-300. I’d rather pay someone to do my Schedule C than that one.
I’ve been told by the TPA how easy it is to mess it up. Yes, some people do their own taxes and file their own 5500 forms, but from what I’m told, many people (especially doctors) who think they know what they are doing often get things wrong, and IRS does not like that. I am all about savings, but when it comes to this stuff I try to think about increasing revenue rather than trying be a penny wise. You don’t want to pay even more for voluntary compliance (ask the TPA about all of the 5500 form mistakes she has seen).
Well, obviously if you’re not going to do it right then you shouldn’t try to do it yourself. But many advisors like to try to convince docs that they can’t do anything themselves, and that’s just not true. Everyone is somewhere along the continuum between know-nothing/do-nothings and do-it-yourself diehards. Those who read 101 comments into a post on multiple 401(k)s, however, are generally pretty far to the right and willing to try doing stuff like a 5500 EZ. Those who hire folks like you and your TPA are far less likely to read this blog post, much less the comments.
Yes, I agree, but you might be surprised that for every person who posts here who does everything themselves there are many more lurkers who are not that confident and need advice. I admit that I have a conflict of interest: I happen to make money for offering advice. But honestly, most advisers can care less if their clients fill out incorrect 5500s and mess up their solo 401k plan. I’m an extremely paranoid one – I just don’t trust myself enough to know everything about everything, and even if I read your blog every day, I still have to call up my TPA, attorney, CPA and everyone else I know to make sure that what I’m doing is correct because I really don’t want to allow even a small chance that my clients mess things up. My standard of service is just too high to allow for a casual ‘yes you can do it if you read a blog post’ attitude. Of course many things can easily be done by reading a blog post (and you have the best ones around, period), but doing your own business taxes and filling out your own 5500 form should probably only be attempted by those who know for sure that they can do it. Everyone else can save themselves time and trouble and hire a professional to do it (or at least have one check their work), and there are many good ones out there who can do it well. Again, that’s not to say that they should hire someone to do everything, but some things are just easier to outsource. At some point when your earnings are high enough, an extra couple of hundred bucks isn’t going to save you money for a service that might be worth a lot more to them. Again, I want to thank you for your blog and for the opportunity to post!
I would agree with WCI on being able to do your own 5500 for solo 401k plans only. There are no HIE or discrimination tests, its pretty much an informational return. If there are employees who are covered (whether or not they contribute) then a TPA is certainly a must.
Konstatin, I understand your resolve to say you have the highest standards of everyone around, but come on, there are lots of great advisers out there who know what they are doing and are credentialed as well. Saying you have the highest standards of conduct yet having no credentials nor regulating body seems misguided to me. There are people out there that know that there is no actual regulatory body for people who call themselves “financial planners”. This is a loophole, the only regulatory body out there is a voluntary one, the CFP Board. Believe it or not it is easier to call yourself a “financial planner” (no regulatory body) than a “financial advisor” (FINRA). You seem like a very bright person, why not go for the highest (available) standard CFP or CFA since you speak mostly about investments.
The only thing I’ll say is this. I will not take the CFP brand seriously as long as CFP allows its holders to sell products, charge high asset-based fees and cease being a fiduciary when it suits them. With fiduciary ‘standards’ such as these, my standards are much higher, and I don’t need any regulatory body to stand between me and my conscience.
Besides, my primary interest in in helping small practice owners open and manage low cost retirement plans, so my role is primarily that of an ERISA 3(38) fiduciary – there is no need for me to get an alphabet soup of designations to provide a much better service to my clients that can be obtained from the alphabet soup holders (which by the way can do exactly as the CFP holders: charge asset based fees and sell bundled products, and STILL claim to be fiduciaries).
Being a fiduciary is just so much more than any regulatory body can handle that I’m not holding my breath that any designation is ever going to come close to mandating everything that is really necessary to provide the best service to the clients.
That would be like my wife telling me she didn’t want to be an MD because she didn’t like how some MDs practice medicine. Your argument against being a professional is ridiculous. Why not go for CFA then? I mentioned that before because you seem very investment focused. You mention that comprehensive financial planning is what you offer but I pretty much only see your posts on investments.
Thanks for all the great articles. Can you give me your opinion on my situation. I think it is fairly common for ER docs.
Full Partner in small democratic group. 401 k profit sharing plan with $53,000 put away each year. All put in by the company.
Job #2 I work 2 shifts a month as an attending at the Academic hospital in town. It is a completely separate hospital system and group in town I am a employee and make about $50,000 from this. No benefits from this group and they say I am not eligible for any sort of retirement plan thru them because I am only part time employee. Payed as W2 employee (part time).
Can I open a solo 401k or SEP for the job I work at 2 shifts a month? How much could I put away each year into this? I also do back door roth IRA and a backdoor ROTH for my stay at home wife as well.
Thanks, Johnnie
No, because you’re an employee. See if they’ll put you on a 1099 basis (and pay you a little more to make up for the fact that they won’t have to pay the employer half of payroll taxes.)
Here is my situation, my wife is finishing residency in june as W2, will start as 1099 solo contractor for separate hospital in July. She can contribute to 401k without match for W2 job, planning to start solo 401k for job starting in july. If she puts 18K employee contribution to the first job will she still be able to do 20% for solo 401k for the 2nd half of the year? thanks in advance, long time lurker, first time poster.
Yes.
Thanks for the quick reply, just to clarify
job 1 W2 1st half of year. 18k employee contribution, 0 match, 0 PSP
job 2 1099 2nd half of year. 18k contribution+ match( total of 2 up to 20% of net income) or would it be 0 employee contribution + match/PSP=20% net….I guess what I am really asking is if she can just have match/profit sharing for the solo 401k for the 2nd half of the year if she has already maxed out 18k employee contribution the first half. Thanks again WCI
Nope. You do not get two $18K employee contributions. Only one employee contribution. But, that second half of the year you can put in a little less than 20% of gross earnings. So if you make $25K as a resident the first half of the year, you can put $18K into the employer’s 401(k). Then you can open a Solo 401(k) and if you make $100K the second half of the year, you can put ~ $19K into the solo 401(k). Alternatively, you can skip the employer’s 401(k) all together for that year, and put both the $18K employee contribution and the $19K employer contribution into the individual 401(k).
Jim,
This topic has generated so much interest that it would be nice to capture all of the different scenarios into a book. Clearly, this would be a #1 seller, not just for doctors but for any businessman. if you can co-author it with an ERISA attorney, that would add lots of credibility and interest. I’d buy the book for sure.
Interesting thought. I suspect you are one of the few who would buy that book but I’ll definitely include a section about it in my tax book when I get around to writing nad publishing it.
I maxed out my 403b at employer A in 6 months, then switched to employer B in 2014. Employer B started putting my money into their 401k, but realized the mistake and refunded me the money after it appreciated in their funds. I just got a 1099 from them for about $3700. I also got a 1099 for about $1000 for a junior faculty scholarship from a medical society.
My question is can I put some or all of this 1099 income into a solo 401k and if so, can I still do this for 2014 if I get it done before the end of March?
Thanks a ton.
The first 1099 is definitely unearned income, and thus can’t be used to fund a Solo 401(k). There are different kinds of 1099s.
The second 1099 could possibly be earned income (it would take more research to know for sure) but there seems little reason to go through the hassle of a solo 401(k) for a single $1K contribution unless you need it for another reason (like rolling in a traditional IRA.)
Appreciate the quick response
Also be sure to see the update “Rule # 7” above about a unique 403(b) rule.
This is a dangerous post because many of your readers contribute to 403b plans. These have a fundamentally different structure from 401k plans. An individual cannot circumvent the 53k limits (plus catch up) by himself or herself with a solo 401k if he or she is mainly contributing to a 403b. They can do it with a working spouse who has a 401k. Also, the 457 limits are separate, as you noted. I think you provided a nice synopsis for 401ks. But notice how many of your readers immediately tried to extend the logic to 403bs. That’s the dangerous part.
It’s not clear to me what you are saying the problem is. 403(b)s don’t typically get combined with profit-sharing plans. All of an individual’s 403(b)s and 401(k)s share the same $18K per year employee contribution. However, they each have their own $53K total limit for employee+employer contribution. Am I missing something? What do you see as the “dangerous” issue?
(BTW, you and I have very different views of what the word dangerous means. There is nothing I do with investments that I consider “dangerous.” Dangerous is giving potassium infusions at “ER TKO” rates or rappelling off a bag of sand in a canyon. Worst case scenario with screwing up your investments is you have to pull some money out and pay some penalties. Yes, it’s a pain but hardly dangerous.)
Sorry. Dangerous is too strong is a word. When I read your post for doctors, I guessed that many of your readers would have 403B plans and try to apply what you wrote to their specific situations. Sure enough. Several of the comments above are about 403Bs.
The main point they should know is that if you’re in a 403B at work and you set up an individual 401K, you control both of those (e.g., the moonlighting hospital employee above.) There’s only one 53K limit for all employer+employee contributions. 403b’s are different from 401k’s in this regard. It seems like it’s an important enough issue to doctors that you should crosscheck this point with a trusted source and perhaps post more about it.
I agree, if that’s true it’s a big deal. Do you have a reliable source/link for that assertion? I couldn’t find anything on it. I did learn something new about 403(b)s while I was researching though. They have a second type of catch-up contribution above and beyond the over 50 one.
I do not believe that this information is correct. Both 403(b) and 401k are subject to section 415 and 402(b) limits, which means that each plan is limited to $53k from all sources and that salary deferral contributions to both plans are aggregated (so a maximum of $18k can be contributed into both). There is nothing that says that you can only contribute $53k into both plans, especially if the employer contribution into the 401k plan can be made.
So if you have a solo 401k, you can contribute $53k into that plan even if you contribute $18k into your 403(b), provided that the solo 401k contribution is from profit sharing only.
That’s my understanding as well, and if I’m wrong I’d sure like to know it.
You are not wrong. Just a misunderstanding. I’ve been there many times before. It is so easy to make mistakes in this stuff, and nobody knows it all (some people who do would never read this blog or post here, unfortunately).
I’m sorry. I should be replying rather than leaving new posts (below). This is the first time that I’ve commented on a blog. Please look at the Boglehead link that I posted below, which includes its own link to a TIAA document that discusses this. The problem is as follows: Laws governing 403B plans were written many years before those governing other similar structures in the retirement system. 430B plans were set up to be controlled by participants rather than the plan sponsor. They’ve evolved over time to resemble 401Ks, but they are not the same thing. A doctor in a university hospital who participates in a 403B controls her plan from the IRS’s perspective. She also controls her solo 401K. Contribution limits for the two have to be aggregated under 415(c) because she is viewed as controlling both.
Talk to the benefits staff of any HR office of a university hospital, and they’ll be very familiar with these rules because, as you said above, doctors and research academics have separate businesses or do a lot of moonlighting and consulting. Normally, university doctors are given very specific instructions about reporting their participation in outside retirement arrangements because universities are now charged by the IRS with monitoring compliance.
I should probably update the post with this information.
Here is a relevant Bogleheads discussion: http://www.bogleheads.org/forum/viewtopic.php?f=2&t=144674
As I mentioned above, take the glass-half-full perspective: This would be a useful follow-up to your blog post, especially for doctors. Thank you for being so diligent about following discussion threads on your site.
A link from Alan S is almost as good to me as a reference at IRS.gov. I suspect you’re probably right about the 403B issue. Maybe I’ll ask him about the source.
Wow, that was interesting. Here’s the link for you:
http://www.irs.gov/pub/irs-pdf/p571.pdf
See chapter 4. It does seem to say that if you own more than 50% of your business that the 415 limit gets aggregated with a 403b!
“Participation in a qualified plan. If you participated in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pensions of all
corporations, partnerships, and sole proprietor ships in which you have more than 50% control.”
So if you have a partnership, you can have a different limit.
Thanks for the link. Chapter 4 actually is just talking about elective deferrals (the employee contribution). What you want is at the beginning chapter 3:
Participation in a qualified plan.
If you par
ticipated in a 403(b) plan and a qualified plan,
you must combine contributions made to your
403(b) account with contributions to a qualified
plan and simplified employee pensions of all
corporations, partnerships, and sole proprietor
ships in which you have more than 50% contro
Hi WCI, I’m a huge fan.. My first posting is now…
I was wondering if you can take a look at my situation to see what would be best for me…
My main hospital (I dramatically cut my hours back to do more independent contractor elsewhere, but they have great benefits for part time docs) …so no HSA with them…
$42K in 2014 W2 , don’t offer a 401K; I decreased my 403B contributions to $0 a couple years ago because I didn’t want to go over annual limit on my 401K through my other hospital
Independent Contractor through a large group “partnership” where we get a “K1” schedule tax form….. $326K in 2014 ; We can contribute a fixed percentage per paycheck and and then “double self match” and by the time I got addicted to your site late last year, it was too late to increase my contribution to eventually max that out… so I was able to get $44K into a pre-tax 401K.
Other IC jobs (through my LLC, in which I’m the sole employee and a “disregarded entity”) (1099) $145K
Gains from stocks $37K
Wife is very part time: her W2 is only $2K (she didn’t set up a 401K with her currently employer yet)
2 kids currently ($5K in each’s 529 plan yearly- so $10K annually) (Michigan married couples can deduct upto $10K)
Third kid on way next month.
I have not done a BD Roth IRA yet (my tax accountant said it wouldn’t work….so I had to get another one…haven’t met the new one yet)…but I do want to set one up for this year
I plan on max’ing out my 401K with my IC “Schedule K- Partnership” ED with $53K for 2015.
I deduct mileage and business expenses as much as I realistically can.
Do you have any recommendations for anything that I can do now before filing my 2014 taxes to lower my tax burden and increase my retirement savings?
How about for the next tax season?
Thanks!
Sounds like you’re a partner, not an independent contractor, if you’re paid on a K-1 not a 1099. Same as me, but it means you have to use their 401(k) not an individual 401(k) for that job. But you should be able to do an individual 401(k) for your actual 1099 independent contractor job.
Why did your accountant say the backdoor Roth won’t work? Is it because you have some huge traditional or SEP-IRA on the side? Otherwise, probably a good move firing him.
It’s probably too late to do much about your 2014 tax bill. For 2015 you can put your $53K into the partnership 401(k) and as much as the law allows into an individual 401(k) for your 1099 work. If you use the employee contribution in the individual 401(k) instead of the partnership 401(k), you should only need ~$175-180K of income to max it out at $53K too.
If you had $37K in taxable income from your stocks in a taxable account, I bet there is a way you can make that more tax-efficient. Be sure to read up on tax-loss harvesting, donating appreciated shares to charity, investing in tax-efficient index funds and muni bond funds etc.
Thanks for the reply.
No I don’t have a SEP-IRA or a traditional IRA on the side. I only have my Partnership’s 401K account and a 403B at my “main” hospital that I haven’t contributed in a couple years due to not wanting to go over my annual limits.
My accountant just said about the BD Roth IRA…”it won’t work” and didn’t really get into it, and I just accepted it. He was kind of old school, and acted like his time was more valuable than mine. That was when I first started on your site last year. Now I know that it does work and has worked… Yes, he has been fired.
You might want to consider a solo defined benefit plan for your LLC income. We start considering these plans for doctors as young as 35, though the optimal age is closer to 38. This is a great plan to have, and you can potentially contribute as much as $60k which can increase every year. However, with your income of $145k, even if you pay yourself the entire salary as an LLC taxed as S corp, your solo db contribution will be only $30k, so this may or may not be worth it.
You can potentially have a solo 401k for your LLC, but you will be limited to profit sharing only (so about $30k). If you have a solo db for the LLC, the solo 401k profit sharing contribution will further be limited to 6%, so with only $30k DB contribution, you might stick with a solo 401k for now if your income is going to be around $145k.
Love the book and the Newsletter! Thank you for the valuable insight! I have referred all of my dental and orthodontist friends to the book and website. Even bought an extra book for one of the recent grads!
I am a 45 YO orthodontist (recent grad 3 years ago) in a solo S-Corp practice. My salary is $180,000/yr; S-Corp distributions amount to another $300,000 or so. We have a practice 401k where I max out the $52,000/yr. I get to keep about 72% of what I put into the 401k since I have to do profit sharing for the employees. I have quite a few older employees, so the ratio is not that great in my favor. I have had several firms look into optimizing it, and that is the best they say it can be until some of the older people retire and my age increases. We have looked into a defined benefits plan, but due to the poor ratio of what I put in to what I get to keep, it did not seem to make sense.
My wife is an engineer who makes around $110,000/yr. We have a $900,00 of practice debt (2.8% for 5 more years) and $120,000 in school loans (1.8% for 18 more years) as well as two rental properties ($100,000 left on each 15 yr mortgage 3% and 3.5%). Thanks to you and a nice practice and my wife’s job, we have already been able to eliminate our higher rate loans. She maxes out the $17,500-18,000/yr pre-tax at her job for the 401k.
My wife and I have both been doing the Back-door Roth’s for the last couple of years, since you brought those to our attention (Thank you–our accountants finally agreed after we explained it to them). Also our 6 YO daughter is on the payroll starting this year to fund her Roth IRA.
My wife is also on the practice payroll $3,000/yr to help pay for travel for CE trips and quarterly Shareholder meetings.
My questions are:
1) Would it be possible (and would it make sense) to increase wife’s salary at my practice and start a 401k contribution at my practice (currently she just has the $3,000/yr salary at the practice) since we are in a high tax bracket. (Alabama also has a 5% income tax). Not sure if the tax savings would overcome the additional payroll taxes, but looks like it would, the answer would also depend on what income tax bracket we will be in when we retire. It could make her a highly compensated employee too, so I may have to run it by the 401k custodian.
2) Should we take additional money now to pay off debt (highest rate now is 3.5% on a rental which we get to deduct some of anyway) or invest the difference. The bulk of our funds are at Vanguard with Index funds. I know the book addresses this, but wanted to get your opinion. Something nice about just getting out of debt, especially with the unknown of the stock market.
3) Do you have any other suggestions that could help us out.
Thank you!
Careful with the 6 yo on the payroll. Might be tricky justifying that in an audit. You may have to convince an auditor that you would have been willing to hire another 6 year old at that price to do that same work.
1) Yes, but she has to do a job that would be worth it. You can’t just throw money around saying it’s “salary my wife, niece, 6 yo etc etc.” Definitely run it by the 401(k) guy and probably your practice accountant too.
2) 3.5% is pretty low once you deduct it at your bracket. Probably okay to carry it and invest, but if you want a sure thing…
Thank you for the quick response. Very valuable information. We will have job descriptions and duties for all family members on the payroll. I appreciate the help! Keep up the GREAT work!
About your 401k. There are other types of designs that reward those who contribute. If nobody contributes, they will not get a penny (and this is legal and approved by the IRS). If you know exactly how much your employees defer (if anything at all), then it would be rather easy to estimate the cost with this type of design (it is called Triple Match). We often use such designs with older employees, and sometimes they work better than the alternatives.
1) As WCI said, you need to follow the right process, but you can increase your wife’s salary to about $20k or so to max out her 401k plan contribution. Here’s more information on how to do it:
http://www.crossroadstax.com/blog/hiring-your-spouse-for-your-practice-make-sure-the-numbers-make-sense
2) What is the tax equivalent interest rate on the debt? If you get a tax deduction on the interest, your effective interest rate is what matters. If it is low, under 2.5% or so, you can easily purchase individual municipal bonds that yield 3% or more, and pay down the debt using the interest payment, for example. If it is closer to 3.5%, I’d pay it down quicker.
3) What about adding a Cash Balance plan? This is also something that might work, or at least something that can be tried (even with older employees). Chances are you can significantly increase your contribution while not having to add anything on top of what you are already contributing to your employees, and at 45 that’s the optimal age to start contributing significant amounts ($100k or more).
Thank you for the input! I will look into your suggestions with our 401k people and may give you a call if we need some help! I appreciate the link and will share it with my friends. Thanks again!
One followup question…
My wife already maxes out her pretax 401k of $18,000 at her other job with her employee contributions (she also get a company match at that job).
Can we still contribute her salary from her job at my practice (I’m thinking $20,000 per the link you attached) to employee contributions–I think the answer is no.
Reading back on some of the original blogs, we may only be able to contribute a portion of her salary from my practice to the 401k at my practice (maybe 18%), plus the company match to her 401k at my practice?
How could we maximize her 401k fund between both of her jobs in this situation?
Thank you!
You are right, the answer is no. But she can contribute just enough to get the match, and put the rest into your 401k plan. If your plan has better investments (low cost index funds), and matching + profit sharing, this might be a better tax move for you. But you also need to consider the fact that you’ll pay FICA taxes on her salary. Talk with your CPA about whether doing this will be worth it for you.
Thank you! I understand. We will check out all options. I really appreciate it!
A little late to the conversation and first time posting. Wanted to thank WCI for saving me from myself multiple times. Had a quick question though to confirm that I’m doing everything I can to maximize my tax-advantaged contributions. I’m have only one employer (W-2 employee at large academic institution) where I personally contribute
18k 403b
18k 457
3.3k HSA
5.5k Roth IRA
in addition to a defined benefit plan of 26.5k a year paid by my employer
Is there any mechanism where I can take advantage of the remainder of the 53k limit (53-18k = 35k) for contributions to my 403b seeing as I am already making the full employee contribution of 18k or any other vehicles that I may not be taking advantaged of as a employee of a one one entity?
Thanks.
No. Not unless you have some 1099 income somewhere. Sounds like you’re pretty much maxing it out. (I assume you’re single, otherwise you could get more into the HSA and do a spousal backdoor Roth IRA.)
Really appreciate the website – your posts seem to be so much more relevant to my situation than what I read from financial magazines.
Can I ask your advice about my plan for 2015 based on what I am learning from this post and blogs:
I am a W2 employee. The company has a 403B plan and a 457B plan. I’m > 50 so can take advantage of the catch-up additional contribution of 6K into the 403B.
I’d like to ask your advice if the following is allowed:
403B:
24K employee contribution (18K + 6 K Catch up)
15K Employer match + employer contribution
21K Employee after tax contribution (my plan allows after tax contributions)
___________________________
59K total = 54K to maximize under the 415(C) limit + 6K for the > age 50 catch-up contribution
457B:
17,500 employee contribution
Total of 76,500K deferred for 2015
I’m thinking that I can exceed the 415C limit for the two accounts combined because the 415C does not aggregate the contributions to the 403B and the 457B.
Then because my plan allows In-Plan rollovers I’d like to do a Mega-Backdoor Roth conversion of the 21K After tax contribution to the 403B into a Roth IRA.
Am I understanding the IRS rules correctly in this plan?
Thanks.
You mean $53K, not $54K I assume, no?
But yes, the 457 limit is completely separate so you’re okay doing both. Cool that you can do a Mega Backdoor Roth.
Yes – typo I meant 53K
59K total = 53K to maximize under the 415(C) limit + 6K for the > age 50 catch-up contribution
I was excited to learn from your website about the MegaBack Door Roth conversion from after tax 403b/401K contributions as that is a very significant benefit for those whose 401B/403B plans allow In Service distributions.
Do you feel that there there any taxes triggered in the year of the Mega Back Door Conversion from either
1) appreciation of the After-tax contribution while in the 403B account prior to In Service distribution/Conversion to Roth IRA, or
2) due to the fact that there are pre-tax $ also held within the 403B (employee or employer contributions)?
Thanks.
1) Minimal if any. Check with the plan.
2) Check with the plan, but I bet you can just separate out the basis. Check with the plan as its rules dictate.
Good post. Would appreciate some light in my situation
Job 1 – partner track w2 – 401k – I will be contributing max to this 401kand then the company will match at end of year based on profit
Job 2 – Hospital – w2 – no retirement plan offered
Job 3 – consulting LLC – only me
1. Can I set up solo 401ks for both job 2 and job 3? If so, how much can I contribute?
2. since jobs 2 and 3 are PRN, I wouldn’t know how much I earned from them until end of year. Assuming I open 401k for each, what is the Time line for my contribution? When do I make the actual contribuion?
1) Not for job 2. Job 3 will be 20% of your profit up to $53K assuming you used the entire employee contribution in the partner track 401(k)
2) You can certainly do employer contributions up until April 15th of the next year. I’d have to review the rules on employee contributions, but it doesn’t sound like you’ll be doing those anyway. You can do contributions as you go along and then one final one when you do your taxes the next year.
As an above poster similarly asked, I recently joined a private group and cannot contribute to a 401k for one year until July 2016. I have the option to continue a moonlighting job paid as 1099, so I would be eligible for a solo 401k. If that job brings about 12-15k next year, can I still contribute 53k into a solo 401k?
Also, how do you recommend getting money from a traditional rollover IRA that I have, and a traditional IRA my wife has, into another investment so that I can contribute to a backdor IRA. Do you think it would be worth it to put our current traditional IRAs into this solo 401k, and is that even possible?
As Mr. Litovsky said, you can’t put $53K into a solo 401(k) for a job that makes $15K. You can put in $15K if you don’t use your employee contribution at the other job. If you max out the employee contribution at the other job, you can only put in about $3K. Still worth it, but not nearly as useful. You can, however, use it to roll IRAs into if they’re too big to just convert. You could just roll your backdoor IRAs into your 401K in 2016. No big deal. Your wife’s may be small enough to just convert.
Thank you both so much for your helpful replies. AFfter I posted this I tracked down a prior post about Solo 401k that was also extremely helpful. I cannot thank you enough WCI for this website and your book, it has been instrumental in my wife and I in planning feeling confident about our financial future.
One last quick question, if we are making say 300k, 20% for retirement would be 60k/yr. If my group contributes the max 53k to my 401k/yr along with 4500 to an HSA, and I put an additional 18k in employee contributions plus 13k for two back door IRAs, as well as max out the HSA with an additional 2k, is that a sound retirement portfolio, or do I need to be contributing more of my pown money to a retirement account elsewhere? More simply, should I coult the employer contributions as part of my overall percentage of my retirement fund, or still find a way to put 1/5th of my gross income into retirement. Thank you
Yes, include the employer contributions. They’re part of your salary, so why not? But obviously the more you save, the sooner you retire.
If your wife can work for you, performing certain duties related to your moonlighting job, then yes, she can join the solo 401k plan for your 1099 income (you will need to give her a W2). If your solo 401k plan is at Vanguard, with a custom plan document you can allow incoming rollovers, and roll all of your traditional IRAs into a solo 401k for both of you. Other solo 401k plans allow incoming rollovers as well by default.
If your moonlighting job brings enough earnings you can max out the solo 401k, keeping in mind that salary deferral between your W2 job and your 1099 job has to be $18k in total. You may or may not want use your W2 job 401k if you make enough income to from your moonlighting job. Vanguard solo 401k will probably have much better investments than those available in your W2 401k plan. Alternatively, you can contribute just enough to get the match, or split your salary deferral contribution between solo 401k and W2 401k if you will not make much from your moonlighting job. In any case, there are several possibilities that are open depending on how much you make as a 1099 contractor.
Suppose I work at hospital A as an Independent Contractor; Large Contract Group pays my LLC- Hospital A LLC. 250K yr (Indv 401k total contribution 53K)
I also work at hospital B as IC; Different Large Contract Group pays my other LLC-Hospital B LLC. 250k yr (Indv 401k total contribution 53K)
Could I have separate 401k’s for each LLC; or is considered the same group since I would be owner of both LLC’s?
You have a controlling interest in your two LLCs (80% or more), thus it is a controlled group, so you get just one 415 limit, thus you can have TWO solo 401ks if you want, but together you can only contribute $53k (if this makes sense).
I agree. The key is to be an employee or in a large partnership at one of them, rather than an independent contractor at both.
WCI,
my partner has a employed job where she will contribute the max (18K) to her 401k. On the side, she runs a website and does freelance work as sole proprietor (and switching to LLC) where she earned about 12k last year, and on pace for 20k or more this year. If I am understanding correctly, she could open a solo 401k plan but only put in 20% of her total income (4k if makes 20K this year) since her employee contribution has been used up at her day job.
thanks for all the info!
That’s right.
I have a solo 401k as an independent contractor. I also own a small company that sells medical supplies, still developing and hasn’t turned any real profit yet. We structured that company’s LLC so it’s joint ownership between me and my wife. if I understand the multiple 401ks correctly; I can’t really contribute more than the $53k limit since I’m the “employer” for both businesses (physician contractor and the LLC company). if we change the company’s ownership to my wife 100%, that should allow us to have another $53k max limit under a second 401k for the medical supplies LLC (since the 2 would be unrelated), is this correct?
Seems a little gray. Might be worth getting professional advice on that one. If it were your uncle and not your wife, I’d say sure. But you guys probably are on the same tax return, no?
If you have any children, the answer is no. This surprised me when I found out. So you can have two separate businesses owned by husband and wife which are not a controlled group (as long as they are not affiliated in any way, as that can also create issues), but as soon as you have a child, it is deemed to be a controlled group because the child own 100% of your corporation and 100% of wife’s corporation, so the two corporations are a brother-sister controlled group.
That’s bizarre. What if your will says the corporations are going to someone else?
That’s indeed bizarre! so I guess I am limited to the one solo 401k I already have as an independent contractor. Any other options to maximize retirement savings using the medical supply company? We already have the solo 401k, an employer-provided 401k, 2 IRAs each (traditional and Roth) and an HSA. anything else that can add to this portfolio?
The one other thing we need to make a decision about is college savings for the kids, not too many great options since we live in CA but will keep evaluating I guess. may be the UT plan?
Roth conversions followed by backdoor Roths? I’d use the UT 529 if I lived in CA.
This one came as a shocker to me, but apparently this is what one of the best known attorneys in the business says. Attribution rules go along with the controlled group rules. So marriage, divorce, children, all of these have an impact on the determination of what’s a controlled group or not, and this is exactly why every case is different and has to be examined on its own merits.
A will is not in force until the passing of the owner though, so that wouldn’t work. A trust is probably what you are thinking of – I guess you can give your company to someone else but the problem is that ‘giving’ will result in that someone having to pay taxes on this gift.
You don’t pay taxes on gifts you receive. The gift tax is a subtraction from the estate tax exemption- affects the giver. But your point is valid.
Wow — Super complicated stuff (for me at least).
Here’s my situation:
(1) full time employee at a VA hospital and already putting in the full employee contribution to the TSP account.
(2) part time employee at a separate University hospital with pay of only ~17,000. My part time status there doesn’t allow me to contribute to the 403b.
Are there any ways I can apply the income from the part-time job toward tax-deferred savings? I’m already using the back door Roth. I’m not a contractor so I can’t do a solo 401k, right?
Thanks for the amazing site and info WCI!
Right. You should have arranged to be an IC at the new job, rather than an employee if your goal was to maximize retirement account contributions. (Maybe you can change that for next year, but be sure the pay is at least a little higher as there are additional costs to being an IC.)