By Dr. Jim Dahle, WCI Founder
I first wrote about multiple 401(k) accounts back in 2013 in a post entitled Beating the $51K Limit (for which I am still eternally grateful to Mike Piper for the pearl that grew into that post). Well, the $51K limit has since grown into the $70K limit in 2025 thanks to inflation, but all the same principles still apply.
I get tons of questions on multiple employer 401(k)s in our Forum, Podcast, Facebook, and Reddit groups, in the comments sections of the posts on this site, and by email. Heck, this post already has over 1,000 comments! Mostly, I wrote this post so I could copy and paste its URL instead of typing the same old stuff over and over again. (Come to think of it, that was the motivation for starting this site in the first place.)
Can You Have Multiple 401(k)s?
Here's the deal. Many physicians work for multiple employers or work as an employee and either an independent contractor or a consultant. Many others have a side job of another type. Their incomes are far higher than they require for their current spending needs, but they're behind on their savings or otherwise have a desire to maximize the amount of money they can put into retirement accounts, especially tax-deferred retirement accounts.
Obviously, these types of accounts minimize tax, maximize returns, increase asset protection, and facilitate estate planning. Who wouldn't want to get more money into them? However, most of these doctors are surprised to learn that they can have more than one 401(k). That's right,
YOU CAN HAVE MORE THAN ONE 401(K)!
Okay, now that I've got that out of my system, let's make a list of the 7 governing rules for using more than one 401(k):
What to Do with Multiple 401(k) Accounts – Multiple 401(k) Rules
Rule #1 – One Employee Contribution Total
In 2025 the IRS only allows you to make a total of $23,500 ($31,000 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 $23.5K ($31K if over 50) or less.
Rule #2 – $70K per Unrelated Employer
The IRS also only allows you and your employer (which might also be you) to put a total of $70,000 for 2025 ($77,500 if 50+) per year into a 401(k). This includes the employee contribution, any match from the employer, and any employer contributions. This is the same limit for a SEP-IRA (if <50) which is technically all employer contributions. However, unlike rule # 1, this limit applies to each unrelated employer separately.
“Unrelated employers” means that the businesses doing the employing are not a “controlled group.” There are two types of controlled groups:
- “Parent-Subsidiary” Group
This is when a parent business (corporation, sole proprietor, LLC, partnership, etc.) owns 80%+ of another business. - “Brother-Sister” Group
This is where 5 or fewer individuals, estates, or trusts own a controlling interest (again, 80%+) of two different businesses.
So if the two businesses you are involved in aren't a controlled group, and they each have a 401(k), (or a 401(k) and a SEP-IRA) you get two $70K limits. Pretty cool, huh? There are several common examples where this could apply to a physician:
Multiple 401(k) – Example #1
A 40-year-old single physician is an employee of two completely unrelated hospitals. The first pays her $200K per year and matches 100% of her first $5K put into the 401(k). It also offers her a 457. The second pays her $100K per year and matches 50% of the first $7K she puts into her 401(k). What retirement accounts should this physician use in order to maximize her contributions in 2020?
- Hospital 1 401(k): At least $5K (plus the $5K match) = $10K
- Hospital 1 457: $23.5K
- Hospital 2 401(k): At least $7K (plus the $3,500 match) = $10,500
- Plus another $11.5K into either hospital's 401(k) (pick the one with the better investments)
- Plus $7,000 into a Backdoor Roth IRA
- Total: $62,500
Multiple 401(k) – Example #2
A 40-year-old married physician whose spouse doesn't work is a partner in a 100 doctor partnership which offers a 401(k)/Profit-sharing plan in which he can “self-match” up to the $70K limit. The partnership also offers a defined benefit/cash balance plan with a $30K limit. He makes $300K practicing medicine. He is also the sole owner of a website on the side that makes $300K per year and has its own individual 401(k). Both 401(k)s offer a Roth option. What is the maximum amount he can put into Roth accounts in any given year without doing a conversion of tax-deferred or after-tax dollars?
- Partnership 401(k)/PSP: $70K, of which $23.5K can be Roth*
- Partnership DB/CBP: $30K, of which $0K can be Roth
- Website Individual 401(k): $70K, of which $23.5K could be Roth* if none of the Partnership 401(k) money represents an “employee contribution”. Otherwise, $0K Roth.
- Personal Backdoor Roth IRA: $7,000
- Spousal Backdoor Roth IRA: $7,000
- HSA: $8,550
- Total: $192,550 of which $37.5K can be Roth*
*Note that Secure Act 2.0 has made some changes which will allow the possibility of Roth matching contributions starting in 2023.
Multiple 401(k) – Example #3
This 52-year-old married physician (spouse doesn't work) is an employee of a hospital where she is paid $200K. She has a 401(k) with a set $20K employer profit-sharing contribution (not a match) and the hospital pays most of the premiums on a non-high-deductible health plan. She moonlights across town as an independent contractor and is paid on a 1099, where she earns $100K and has opened up an individual 401(k). The hospital 401(k) has terrible investments and high fees. How should she allocate her retirement savings in order to best use these options?
- Hospital 401(k): $20K employer contribution
- Individual 401(k): $31K employee contribution (50+) + 20% * $100K = $20K employer contribution = $51K (technically slightly less due to Rule # 5 below)
- Personal Backdoor Roth IRA: $8,000 (50+)
- Spousal Backdoor Roth IRA: $8,000 (50+)
- Total: $87K
Multiple 401(k) – Example #4
A 40-year-old single physician is in a business partnership with one other physician and they have several employees. Due to hassles and the costs of their employees, they have opted to use a SIMPLE 401(k) for their practice. He makes $200K. He also does some consulting work on his own as a sole proprietorship where he is paid on a 1099, about $50K per year. He and his physician business partner recently opened up another business where they sell a medical device. They are the only owners of both the practice and of the corporation that sells the device (which has no employees). He makes another $50K from this company of which $25K is salary and $25K is a “distribution” from the S Corp. What kind of retirement set-up should this physician do?
- Practice SIMPLE IRA: $16,500 employee contribution plus $6K (3% of salary) employer contribution: $22,500
- 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: $22,500
Rule #3 – Employer Contributions Are 20% of “Net Earnings from Self-Employment”
When calculating the employer contribution for a SEP-IRA or an Individual 401(k), you use your “net earnings from self-employment”. This includes any amount used for an employee contribution, but excludes the amount used for S Corp distributions (those aren't “earned income” and so can't be used for retirement account contributions) and the amount used for the employer half of the payroll taxes (same as the self-employment tax deduction).
The employer contribution in an individual 401(k) and a SEP-IRA is exactly the same (for those under 50), but since you can also make an employee contribution into an individual 401(k) (and 401(k) money isn't included in the backdoor Roth pro-rata calculation), a 401(k) is generally the better option for the self-employed, even if it is slightly more complicated to open (and must be opened in the calendar year rather than before tax day of the next year). The possibility of a Roth SEP IRA starting in 2023 could provide another way around this rule.
Note that an employee owner of an S Corp is limited to 25% of W-2 compensation as an employer contribution.
Rule #4 – You Only Get One SEP, SIMPLE, or 401(k) per Unrelated Employer per Year
Each unrelated employer should only have one of these three types of accounts for each tax year. You can technically have more than one, but they share a combined limit. However, you could open a SEP-IRA for your self-employment income in March 2025 for tax year 2024, and then open an individual 401(k) in June 2025 for tax year 2025 if you like. Remember that just because you are the sole owner of two separate businesses doesn't mean you get two different retirement accounts. Those businesses are a controlled group.
Rule #5 – These Rules Have Nothing to Do with 457s, IRAs, or HSAs
457(b)s, Backdoor Roth IRAs, and HSAs all have their own separate limits that have nothing to do with the limits for 401(k)s, 403(b)s, SEP-IRAs, and SIMPLE IRAs. Putting more into a Roth IRA doesn't mean you can't still max out your 401(k).
Rule #6 – Catch-Up Contributions Also Allow You to Beat the $66K Limit
Many accounts have catch-up contributions if you're old enough (usually 50 or older, but 55 or older for HSAs). Roth IRAs have a $1,000 catch-up, HSAs have a $1,000 catch-up, and 401(k)/403(b)s have a $7,500 catch up. That $7,500 catch-up is in addition to the $70K limit, so if you're over 50, you're self-employed with lots of income, and you make your full $31,000 employee contribution to your individual 401(k), the $70K limit becomes a $77,500K limit. Note that 457(b) catch-ups and 403(b) catch-ups work slightly differently.
If 401(k)s are so great, why just stop at one?
Rule #7 – 403(b)s Are Not 401(k)s
Many physicians have access to a 403(b) by working for a hospital or public entity. There is a unique rule for 403(b)s, however, which will prevent many doctors who use a 403(b) at their main job from maxing out an individual 401(k) on the side, at least if they own 50% or more of the company for which they have an individual 401(k) (and they probably do). It doesn't make much sense, but neither do many tax and retirement plan rules out there. Basically, your 403(b) at work, unlike a 401(k), is considered to be controlled by you. So you are stuck with the same 415c limit of $70K (see Chapter 3 at the link). So if you put $23.5K into your 403(b) at work, you are only allowed to put $70K-$23.5K=$46.5K 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 $70K limit for each unrelated employer. However, taking a look at this article on IRS.Gov written in layman's language, you can see this is true:
Overall Limit on Contributions
Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:
- elective deferrals
- employer matching contributions
- employer nonelective contributions
- allocations of forfeitures
The annual additions paid to a participant’s account cannot exceed the lesser of
- 100% of the participant's compensation, or
There are separate, smaller limits for SIMPLE 401(k) plans.
If that's not enough for your accountant, you can simply go straight to the actual code sections in question, in this case, 415(c) (where the $66K limit comes from, originally $40K). Be sure to scroll through subsections (f) through (h) where the relevant examples are used:
(f) Combining of plans
(1) In general
For purposes of applying the limitations of subsections (b) and (c)—(A) all defined benefit plans (whether or not terminated) of an employer are to be treated as one defined benefit plan, and(B) all defined contribution plans (whether or not terminated) of an employer are to be treated as one defined contribution plan.
Note how it says all defined contribution plans OF AN EMPLOYER are to be treated as one plan. Section (g) reads similarly:
(g) Aggregation of plans
… the Secretary, in applying the provisions of this section to benefits or contributions under more than one plan maintained by the same employer, ….with respect to which the participant has the control required under section 414 (b) or (c)…shall…disqualify one or more…plans…until such benefits or contributions do not exceed the limitations contained in this section.
Thank you WCI and Kon Litovsky. It would be great if one could put after tax dollars into an individual 401K plan and have an in-plan conversion. That would definitely make it worthwhile for the extra Roth space. Does this require a special set up for the individual 401K plan?
WCI
You only get one $18K employee contribution, no matter how many 401(k)s you have. So if you used it up at your W-2 job, you can’t use it again in your individual 401(k). Not gray
You had mentioned that you contribute 18K employee contribution to both your 401Ks or did I misunderstand you . “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.”
How are you able to overcome this in your situation
Thanks
One 401(k) has employee and employer contributions. The other 100% employer contributions.
Yes, it is possible to do that with a custom plan document. You’ll need to find a Third Party Administrator who’d be willing to do that for you. Also, once you get a custom plan document, most TPAs will charge you a fee for administering the plan and tracking all of your conversions and contributions, which can get costly for a small plan like a solo 401k.
You can make after-tax contributions with non-earned income?
Got you. Thank you.
Another related question with the individual 401 k. If on a given year you don’t have any 1099 money (no locums that year) could you still do the mega back door Roth that year by putting 53k of after tax dollars and converting it to a Roth.
What would stop you from contributing 53K every year to Mega back door Roth once you have an individual 401 k plan set up to accept in plan conversion.
This would be a huge deal if allowed. I haven’t seen any options on the Solo 401ks I set up to allow for after tax contributions with in plan conversions. This would be news to me and would like to know which plan/custodian/TPA that would allow that. I would certainly do it for my plan and slowly chip away at our taxable accounts and turn them into Roth money.
I did find a link to this article by financebuff on how to set up a mega back door Roth IRA for a solo 401 k
https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html.
Still not sure if you can make after tax contributions with non earned income? Anybody know this.
I think probably not but would love to be wrong.
All earned income. You can’t make any retirement plan contributions with unearned income.
WCI, thank you for the interesting topic. I work primarily as an employed ER physician in one state but do locums work in another state. For 2015 I have made 300+ at my primary job and 72k at my locums position. If I understand correctly, I can put 18% of this locums money into a solo 401k? I have already contributed the maximum of 53k into my employer and employee contribution at my primary practice so this locums money that I will contribute (about 13k) will be considered an employer contribution at another independent job. Please feel free to correct me if I have misunderstood anything about this process and again thank you for all you do.
Sounds right.
After reading this entire comment section, I thought I had this figured out, but now I am slightly confused. I am not a white coat and my current income doesn’t come close to what you guys get, however, I have income from three separate businesses and would like to figure out the most advantageous way of filling a solo 401k or 3, so hopefully you can give me some feedback.
Bus A – I have my own business of which I am a 100% owner (currently a corporation that will be dissolved at the end of 2015) I would like to put as much of this income as possible into a solo 401k (it’s not much and would not max it). (I have been trying to understand the controlled group rules and may possibly fit under the brother-sister group, but am not sure of that, since I am 100% owner of one business and 50% of the other. These businesses are completely unrelated and have no interaction with each other. Do I have to get a ruling from the IRS?)
Bus B – My partner (SO – not married) and I also have a 50/50 partnership business. We opened a solo 401k on this last year and put all of the net profits into it as an employer contribution. (very small amount)
Bus C – In addition, my SO is an IC for another completely unrelated company and has 1099 income. I work part-time for him in this business and he gives me a 1099 as a sub-contractor. I had not considered using any of this income to fill a retirement account, but am now wondering if I should or if it’s possible? Would that be a 3rd 401k ?
We are also over 50 so the catch up amounts apply.
If I use Bus. A to fill the employee portion up to 24k; then would I take 20% of net profits of A, then B, then C assuming I would still be under the 59k max ? And after I dissolve to s-corp how would all that change?
Thanks so much – your site has already helped a lot.
You’re going to have trouble opening a solo 401(k) before the end of the year. A SEP wouldn’t be hard though.
I would call business A and B related. Why not just use your same solo 401(k) for both with one $53K limit (+ catch-up)?
Bus A and Bus C are also related since you own 100% of both of them.
I think you only get one solo 401(k) total in this situation. Sorry.
One solo 401k would be fine. If I am making an employer contribution, the money has to be sent directly from each business which have separate EIN’s – do I add on to the plan documents? – I just want to make sure that is the legal way to do it. And yes, it would be short to get another one opened before the end of the year. Thanks.
While I haven’t been in that situation, I think that would be the proper way to do it.
Sorry, missed this one. You can have a multiple employer plan (definitely need a custom plan document). This is in case more than one employer participates in the plan. If you get multiple 1099s, you can have them all go to a single entity. This is very much doable.
Black Hat – Have you figured the legal way to do this yet?
I also have couple of partnerships which would qualify as related businesses for the purpose of retirement plans. They don’t make a whole lot so I would like to setup a solo 401K with both contributing to it within one limit.
Also, can the same be done for cash benefit plan?
Black Coat – Have you figured the legal way to do this yet?
I also have couple of partnerships which would qualify as related businesses for the purpose of retirement plans. They don’t make a whole lot so I would like to setup a solo 401K with both contributing to it within one limit.
Also, does anybody know if same type of sharing can be done for cash benefit plan?
Multiple employer plan might work here. I don’t see this much, though in CA and other community property states husband and wife with two separate practices would need a single plan if one of them has employees, so in that case you can have a two-employer plan. I believe this is as simple as drafting an appropriate plan document.
Good question. I don’t know the answer to that for sure but I think it is yes.
Yes indeed! You can have a multiple employer DB plan. Have to be extremely careful though how this is set up.
Do you mean MEPs? Those seem to require two or more unrelated employers.
Sorry for the confusion, I was not using the terminology correctly. Yes, there are multi-employer and MEP plans. This is neither. I think that this is just a matter of adding all of the controlled/affiliated entities to the plan document and naming the plan accordingly. I don’t believe there is a name for this because it is not an MEP (unrelated employers). It is a plan for a SINGLE employer (after all, that’s what affiliated/controlled groups amount to – having one single entity under common control that employs everyone). The TPA should know how to handle this, that’s all. Failure to include other entities (esp. with employees) can cause big problems, so it is always a good idea to identify all of the entities that form a single employer for the purpose of retirement plan testing.
Question. Currently third year resident will be graduating in 5 months. Is this scenario feasible?
Job 1). Residency currently putting 300/month into it (will total 1800 by graduation)
Job 2) main job starting in August, roughly 450k/yr maybe 200k given the short year I’ll have in 2016 with them. Allows 53k into 401k
I assume I can put 53k-1800 (403b contributions) or 51200
My main question is with my current moonlighting gig
Job 3) 1099 will probably make 25k from Jan to July…. Can I open a solo 401k and put another 53k into this for 2016? ( most obviously earned from job 2)
I believe you’d be able to do $1800 into the job 1 401(k), possibly as much as $53K into the Job 2 401(k) (assuming you’re a W-2 employee there) but no more than $16,200 as an employee contribution and ~ $5K (20% of self-employment earnings net of self-employment tax) into the Job 3 individual 401(k).
Thanks for the great summary and discussion. Because this topic isn’t convoluted enough, i decided to add another layer of complexity. As you have discussed elsewhere, the IRS has now formalized policy about rollovers of AFTER-TAX contributions to 401k plans. My question is this: I have two 401k plans (employer and solo 401k, and both plan documents allow for AFTER TAX conributions and in service rollovers. I’m 55 years old. What would the maximum total AFTER TAX contributions be that I could make, using both plans?
I have an inordinate imbalance in my savings with ~80% being tax deferred (IRA and 401K) and ~15% in tax advantaged accounts (Roth 401K, backdoor Roth IRA) and 5% in a nonqualified brokerage account.
Spoke with my CFP and he was unsure. Got the same response from my CPA!! (maybe I need to get different financial guys?!?!)
Yes, both of them should know this (or at least they should research it to find out – looks like they are taking you for granted). However, this is common – most CPAs and advisers are not experts in retirement plans unless they deal with these plans all the time.
So because you have two plans and two limits, you can contribute up to your plan limit, or $53k ($59k with catch-up). But you can only have one catch-up for both plans. And you can only have one salary deferral of $18k for both plans. So my take is that you can contribute $24k in Roth salary deferrals and $88k in after-tax contributions into both plans if your W2 plan allows this. You can then take after-tax contributions and convert to Roth by doing the following:
1) Move it to a Roth IRA (from your W2 plan), if it allows outgoing rollovers of after-tax assets.
2) Convert the solo 401k after-tax contribution to Roth inside the plan (this is not available yet in custom plan documents, but in couple of years it would most likely be – right now, only tax-deferred can be converted inside the plan, unless you get an ‘extra’-custom document). Otherwise, moving this money to a Roth IRA is an option.
https://www.irs.gov/Retirement-Plans/Rollovers-of-After-Tax-Contributions-in-Retirement-Plans
Thank you so much for the thoughtful and speedy response! I asked the same question of my son (a CFP but we like to keep family and business separate). He got back to me this AM. He thought he knew the answer but wanted to confirm it by asking the local pension corp he uses. He came up with the exact same strategy/answer that you gave. Like you, he was not very impressed with my financial team. In fact, he said if either one doesn’t get back to me, I should consider a change as I’m not getting good value for my $$. He was more forgiving of the CPA than the CFP though.
I’ve been dealing with exactly the same problem: where to get the answers I needed quickly and accurately. So I just found myself a medical/dental CPA, an amazing TPA and an actuary, an ERISA attorney and an insurance broker, all of whom are some of the best in business (and who also happen to respond to inquiries very quickly). One person rarely knows everything as there are just too many different moving parts, so having a quality team is always best (and the best isn’t always in one’s back yard – my team is all over the country). In this complex area, getting the right answer is key, and things change all the time, so we always have to be on the lookout for the effect of these changes on your retirement plans.
The problem with your CFP might be that you are paying them via asset-based fees, rather than fee for service, so their job is to ‘manage your investments’, while everything else is rarely addressed or taken care of. Technically, CFPs are supposed to be planners, but in practice, once they get a taste of asset-based fees, everything goes right out of the window because asset-based fees create multiple conflicts of interest:
https://litovskymanagement.com/2012/08/no-aum-fees/
That’s why I always recommend working with advisers who are compensated via flat fees, and who not only have specialized knowledge needed by doctors and dentists (on topics like retirement plans), but who would also collaborate with your other advisers, and if your other advisers are not there, they should step in and provide leadership to take care of things that your other advisers have been ignoring.
I would appreciate your advice
here is my situation
I am an employed physician working for a hospital owned medical group.
I get paid by a W2. I have a 401 k and 457 plan at work to which I contribute the maximum (18k each) . There is 6% matching by employer for the 401k.
I also do some speaking for various pharmaceuticals and some online/phone surveys. These activities only provide small extra amount of income (about 10-11k last year) which is paid as independent contractor (1099). However a significant portion of that extra income goes into taxes as I am in the highest tax bracket. I was interested in finding out what options do I have in setting up any additional retirement plans so that I can contribute additional money pre tax.
Is it worth setting up a solo 401 k for my speaking fees and surveys?
I understand that I will need to pay employer portion of SS tax and medicare tax as well if set up a 401 k?
I would appreciate any help
thanks
Yes. It’s worth it. You could put something like $2-3K in there and knock $1000 off your taxes.
thanks for reply
I am trying to figure out how much i will save on taxes if i open sep IRA (its too late for 401 k for 2015)
if i contribute 20% of income to SEP- IRA, it will be $2,000 (total income of 10-11k). for Taxes that will save me about $792 (39.6% of 2,000 for ordinary income tax) plus $29 (1.45% of 2,000 for medicare tax) and $18 (0.9% of 2,000 for additional medicare tax). so total savings of $839.
but i will have to pay employer portion of SS tax on the $10,000 which will be $620 (6.2% of 10,000)plus medicare tax of $290 (2.9% of 10,000). so total tax will be $910.
so given these numbers do you still think its worth it?
Are the calculations correct or am i totally missing something?
You don’t get to save any payroll taxes, just income tax. So if the hassle is worth $792 for you, then go for it.
No exactly true here, I assume JP will be over the SS wage base so he will not pay any self-employment tax other than the medicare portion. This is true with or without the Solo K or SEP.
Moonlighting while in fellowship costs you dearly at tax time, moonlighting while already making over $120k elsewhere isn’t so bad.
you are right I will be over SS wage base. therefore I only included the employer portion of the 6.2% for SS taxes in my calculation which I believe I only have to pay if I use SEP or 401k.
Don’t I still have to pay the employer portion of SS taxes even if I am above the SS wage base. my regular w 2 obviously only accounts for the 6.2% of the employee portion.
If I don’t use 401 k or SEP then I don’t have to pay the extra 6.2% of the employer portion of the SS taxes.
How do I save on taxes with the 401k or SEP. According to the calculation I listed above, I end up paying more in taxes $910 (with 401k or SEP) vs $839 (without 401 k or SEP)
is there something wrong with my calculations?
If you pay more in taxes by putting money in a tax-deferred account then yes, there is something wrong with your calculations.
WCI can you plz kindly point out what is wrong in my calculations?
I have explained all the calculations above.
I couldn’t really follow your calculations. You made it far more complicated than it needs to be. Here’s the way it works:
If you contribute $2,000 to a tax-deferred account, and your federal marginal tax rate is 39.6% and your state marginal tax rate is 5%, then your tax bill is reduced by
$2000* (39.6%+5%)= $892
Hope that helps.
You pay payroll taxes whether you spend the money or save the money. No difference. The only way to avoid them is to not earn the money in the first place. So no sense in bringing them into the calculation.
Hi WCI
thanks for clearing my confusion.
I don’t think I can contribute to solo 401 for 2015 now.
If I contribute to SEP IRA, I understand it would affect my backdoor roth IRA conversion.
I just made the roth conversion for 2015 for myself and my wife.
i believe i can roll over the SEP IRA to solo 401 k .
I can go ahead and open a solo 401 k for 2016.
when can i roll over the money from SEP IRA to solo 401k?
can i open SEP IRA for 2015 and solo 401 k for 2016 in the same year and the roll over the SEP IRA to solo 401 k in the same year?
If i am able to roll over within the same year then i can do my backdoor roth conversion for 2016 in early part of 2017
Is there a better way of doing this?
thanks
Yes, for 2015 you could do a SEP. Then open a solo 401(k) for 2016 and roll the SEP money in there-no waiting period required. You can then do your 2016 backdoor Roth (in 2016.)
HI WCI
Thanks for your reply
can i open the SEP IRA and then solo 401 k at vanguard.
I remember reading somewhere that the vanguard solo 401 k does not accept roll overs?
I have my employer retirement account at fidelity but my personal roth IRA accounts at vanguard.
any suggestions if one is better than the other
thanks
Yes, you need to make sure your individual 401(k) accepts IRA rollovers.
https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/
I think Fidelity, Etrade, and TDAMeritrade do accept them, but last I looked Vanguard doesn’t unless you get a custom 401(k) design.
1. does your 401k allow after-tax contributions? If it does, you might want to consider this option as it allows for Roth rollovers down the line.
2. assume you’re doing a back-door Roth already?
3. I believe you have to pay SS and Medicare on net self-employed income regardless of the retirement vehicle you choose.
4. That leaves you with an SEP-IRA vs a 401K for your 1099 employer contributions. I think it’s a toss up between the two in your case in that you’ve already maxed out your total allowed personal contribution (18K). Both allow 25% of W2 or 20% of self-employed income employer contributions. SEP-IRA setup paperwork might be a little less cumbersome . . .
SEP IRA paperwork is for sure easier, but it screws up your backdoor Roth IRA pro-rata calculation.
how does the 401 k after tax contribution work? and how are you able to do roth conversions down the line.
my employer 401 k and 457 are with fidelity. is this something common for plans to have this option.
when I call fidelity about it what exactly should I ask them (they usually tend not to be very knowledgeable)
Thanks
“Does my plan allow me to make non-Roth after-tax contributions?” If so,
“Does my plan allow me to make in-service withdrawals or Roth conversions?”
Hi WCI,
I have an employed physician job with a hospital (403+ 457 + match). I put in 18K to the 403, 18K into the 457 (I know it does not count towards the 53K limit) and the hospital puts in 21K as a match.
I also have an S Corp side practice. I made 45K in 2015 and am projected to make 90K for the S corp in 2016.
So if I opened a solo 401K, I would be able to put in employer contribution only right? Is this math correct?
90K x .25 = 22.5K into solo 401K for tax year 2016.
I missed the deadline to do the solo 401K for tax year 2015 and I would prefer not to create SEPIRA (because I already have a backdoor Roth from two years ago).
Hi WCI:
Thanks for your contributions to an interesting topic.
I have a full-time job as an employee where I receive all benefits (403 + 457 + match). I put in 18K + 18K and there is a 21K match.
I have two questions:
I have a side practice which is an S corp: I made about 45K in 2015 and will make more for the S corp in 2016.
So I would be able to contribute 25% of my earnings from the S corp for 2016 if I did a solo 401K right?
My next question is regarding opening of the solo 401K. I have three workers in my practice (two MAs and one echo tech). My acountant feels that the echo tech can be easily classified as an IC but not the MAs.All staff work less than 200 hours per year and are paid hourly. I’ve read some stuff on investopedia and the IRS regarding classifying workeds and it seems to be about how much control I have over them.
If it turns our that the MAs are part-time employees, would I still be eligibile to open a solo 401k?
Thank you.
JS
While you can contribute 25% with a W2 into a solo 401k plan, your total contribution will be limited into a solo 401k PLUS a 403b plan to $53k. That’s just one more rule to worry about.
Unless you have all ICs, I don’t believe you would be able to have a solo 401k with any non-spouse W2 employees with the way solo 401k plan documents are written. For that you might have to get a custom plan document so that you can specifically exclude those W2 employees who work less than 1000 hours, and then you can simply pay all of your employees with a W2 (we don’t want you to break the law by paying some as ICs where that’s not warranted).
https://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans
I agree. And remember the 25% rule is really 20% depending on how it is calculated. It is 25% if you don’t count the contribution as part of the total salary and 20% if you do, but really the same number. So if you make $100K and put in $20K, that $20 is 20% of the total and 25% of the total minus the contribution.
OK so as it gets closer to Dec 31, here is my situation.
18K into 403B, 18K into 457B and (there is also a 21K match from employer which I do not count towards my retirement planning due to a complicated vesting structure).
I realize the IRS counts the match so my understanding is that the maximum I can have across all accounts (even with unrelated separate employers) is 53K. So 53K – 18K (from 403B) + 21K (match) = 14K that I can put into a S401k.
S Corp salary to me this year will be about 30K.
Deferred salary for my wife is going to be $7200.
So my understanding is we can put entire 7200 for my wife into a solo 401k under the S corp as an EMPLOYEE CONTRIBUTION.
I can get $6500 (25% of 30K) into an EMPLOYER contribution into a solo 401k under the S corp.
My questions are:
1. Are the deadlines for the EMPLOYEE and EMPLOYER contributions different? I was told Dec 31 for both by my accountant but Fidelity says it is 12/31/16 for my wife’s EMPLOYEE contribution and 3/15/2017 for EMPLOYER CONTRIBUTION for me (S corp filing deadline).
2. Is my wife eligible for EMPLOYER contribution of 25%? My understanding is no since she is setting aside 100% of her pay into the s401K and I don’t think the EMPLOYER and EMPLOYEE contribution can exceed 100% of one’s pay.
Thank you.
jsong23
The 457 limit is totally separate from the 403(b)/401(k) limit.
Your limit is 20% (actually slightly less) of $30K, so something around $6K. $6K + $18K + $21K is still under $53K so you’re good there.
1) You can certainly put in employer money after the 1st of the year, but I’d try to do it all by Dec 31st. I think the employee contribution needs to be in by Dec 31st. So I agree with Fidelity, not your accountant.
2) I don’t see why you can’t set up your wife’s employment agreement so she gets a match. I can’t recall reading a rule anywhere that says the employer and employee contribution cannot exceed 100% of pay. In reality, her pay is her salary plus her match. Now, money that goes toward her match cannot be used to calculate your maximum employer contribution of course.
Trying to figure this out for my brother (physician too). He works for a university and gets a W-2 and does the university 401a, 403b and 457b. He puts 18k of his salary in the 403b
He also moonlights part time for a completely unrelated VA hospital. However he receives a W-2 from them. Since the VA work is fees based he does not qualify for any retirement benefits at VA.
My question is can he open up a solo 401K for his W-2 income from the VA hospital (roughly around 100K) and if he can how much is he allowed to put in.
No. You cannot open an individual 401(k) for W-2 income. It is for self-employed income only.
My question is about IRS rules regarding affiliated service group. I think in your Example #4, physician violates this rule. He is a partner in office practice and also consults on the side. He has 2 separate corporations and 2 different 401Ks:
•Practice SIMPLE IRA: $12,500 employee contribution plus $6K (3% of salary) employer contribution: $18,500
•Consulting Individual 401(k): $5,500 employee contribution plus 20% * $50K = $10K: $15,500
However he provides relatively similar medical service for both. Isn’t it a violation of IRS rules regarding affiliated service group and indeed both retirement plans in these companies have to be identical?
I had this issue come up during discussion with my CPA when I suggested that besides my medical outpt practice (6 partners, 16% ownership) I set up a consulting solo corp on the side for the on call work (1099) I do for a local hospital. My CPA said solo corp has to have identical 401K as my medical group practice because of affiliated service group rules. Even though hospital follow up patients comprise ~1% or less of my outpatient practice and inpatient work is substantially different – different types of patient problems, different acuity and some procedures not done as outpt. I am a GI doc btw.
I referenced IRS affiliated service rules below.
https://www.irs.gov/pub/irs-tege/epchd704.pdf (pages 38-60)
Just because a doctor does two jobs within their specialty, one for his group practice and one for a hospital does NOT make this into an affiliated group just because they do the same tasks for both jobs. If the doctor uses his practice facilities to earn 1099 income in addition to practice income (or uses practice employees), that’s an indication that this might be an affiliated group.
In your case, I do not believe this is an affiliated group unless there are other facts not presented here. Do you have a separate S-corp for each partner in the practice? Does your practice operate out of the hospital facilities?
My outpatient medical group practice is S corp, owned equally by 6 of us. We also use outpatient surgical center which is another S corp and also owned by 6 of us. Less then 1% of our outpatient business ends up being done in hospital, and less than 1% of hospital on call patients come back to the office of on call doctor. Doctors don’t own other individual medical S corps. 5 of us take call at the local hospital who pays 1099 income (based on set fee per call night) – it is currently paid once monthly to the medical group. My plan is to form a solo corp and either carve out hospital on call compensation from group and transfer it to solo corp or directly approach hospital and have it send 1099 to my solo corp.
My CPA proposed to write IRS (determination letter) to have them rule on my situation, then set up solo corp and 401k if IRS gives green light. He pegged the cost of the letter at $4500 to IRS and $5-10,000 for his service. Ouch!
You do want an opinion letter from someone – this is a complex situation, but it is not necessary to do what your CPA proposes. Please get in touch with me ([email protected]) and I’ll refer you to my ERISA attorney. For a fraction of that he’ll come up with an opinion letter you can take to the IRS if they ever ask questions. This is ERISA law, and I’m not sure IRS will be able to give you an answer in a timely and cost-effective fashion because this would require someone asking the right questions. IRS by the way might charge as much as $10k for a private letter ruling (which it sounds like this might be).
I don’t think I’d be interested at that price.
I am finishing residency and have accepted an independent contractor position in emergency medicine. I also plan on doing some locums work. My wife is currently unemployed. If I set up a solo-401K at my main job (independent contractor), can I also use separate locums income to set-up another retirement account? I also plan on maxing out backdoor Roths and HSAs for me and my spouse.
Sounds to me like those two companies would be related, so one $53K limit between the two of them. If you are an employee with the locums work, then you may be eligible for any 401(k) they may offer. But that would be unusual.
Thanks for the advice!
I wanted to know, if I can open 2 solo 401k for my own company. so that I can split the amount between two company accounts for example(Etrade and schwab).
I waated to do this so that I can withdraw as a loan $50k each from 2 accounts.
Let me know if that is possible.
I don’t think you can open two in the same year (not 100% sure though), but I suppose you could open and fund one this year and then open and fund another next year. Pretty unusual situation. If you really need the money as a loan, why not just skip the contribution in the first place? Are you just trying to “save” tax-advantaged space for later while getting the deduction now?
yes you are correct. Wanted to save on tax deferred space and get loan from 2 accounts so it would be 100k.
Suppose I have 200k in one account I can get a loan 50k. if I have 2 accounts(100k in each)) then I can get 50×2=100k loan.
What if my company is acquired mid-year? In your opinion are the acquired and the acquirer two unrelated employers, and could I thus exceed the $53k limit?
You don’t have two unrelated employers, you have just a single employer who employs you, so the previous plan is terminated and a new plan is installed with the same limit, unless you happen to work for two companies simultaneously and have access to two different plans.
That’s a heck of a good question that will require somebody smarter than me to give a definitive answer. Bear in mind that the plan rules are probably going to dictate what you can actually do, so go read those and see what HR will let you do. You certainly can’t do two employee contributions anyway and chances are without that you won’t get much of a match.
Thanks for the reply. I am one of the owners of the company being acquired, so I could theoretically make a $53k employer contribution before the acquisition closes while it is a separate entity and then do employee contributions (plus any match they have) in the acquirer plan once I am an employee of the new entity. If it’s legal that is. 🙂
Sounds like an ideal situation to me. Worst case scenario- the IRS disagrees and you have to pull the money out and pay some interest.
Actually, the buying company most likely has very specific rules in place regarding things like that. This is not just about IRS disagreeing. When they disagree, the plan sponsor tends to be on the hook for some hefty penalties, so I would not suggest breaking any rules without consulting with someone (this might require taking a look at both of the plan documents and/or specific conditions of the purchase).
Here’s my situation…
I’m a partner in a 7-partner urology practice s-corp (~380k W2) and max out 401k at $53k. I have back-door Roths for myself and my wife as well as an HSA, all of which I max out. The 401k is crummy, with high-fees and bad investment options. I’m working on getting the practice to switch, but as a junior partner, it’s been an uphill battle so far.
I also make about $30k/year on a 1099 for on-call income from local hospitals. Could I set up an individual 401k? If so, how much could/should I contribute? Would it be possible to roll my practice 401k into my individual 401k?
Yes
Almost $6K.
Probably not, but read the plan document to see for sure.
I doubt any of the cookie-cutter plan document allows that, unless there are in-plan Roth conversions enabled.
Here’s the short of it. We get approached by group practices with the type of plan that yours has. The biggest problem they have is not the high fees, which simply hit them where it hurts as far as returns. This is an individual/personal problem (which should be addressed, because over decades it can amount to hundreds of thousands and even millions in extra fees spent on nothing). There are other problems your partners should worry about. For example, such plans are often mismanaged, and have lots of administrative and compliance problems. This would potentially cause big penalties in case of an IRS audit (which happen a lot more with retirement plans than people realize, especially when there are red flags and there is nobody in charge). So, the first thing I would recommend is to have your plan reviewed across the board, starting with admin/compliance, as well as everything else including cost. It might be the case that the plan has been sold by a broker who is a relative of one of the owners (or an adviser for one of the owners – that’s another variant that’s more common – this creates problems especially if the partner gets any benefit out of this arrangement, such as a lower fee breakpoint). If you have any non-partner employees, there are also significant fiduciary concerns that have to be addressed. This does not have to be a painful process, and if started early, it would be best to address any issues your plan has without waiting for a call from IRS. Just make sure you work with someone who is an independent fiduciary and who is not trying to sell you anything, and remember that your TPA/plan provider/broker is not a fiduciary, so they don’t have to tell you anything about your plan’s problems.
How would I go about finding someone to review the plan? Our practice advisor is an accredited investment fiduciary, whatever that means, but I do think that the plan is compliant.
Well, since your plan has an adviser, they should be taking care of you. AIF means nothing – if they are not an ERISA 3(38) fiduciary, they are not even a fiduciary for your plan. And even then nobody says that an ERISA 3(38) can’t overcharge or use high cost funds – I’ve seen it all.
Often, advisers have no idea about plan administration, and there is little or no communication between the TPA and the adviser. If they are getting paid with assets under management fees, they would have no interest in doing much for your plan since they are getting paid regardless. Many advisers are also compensated with revenue sharing, etc., and this creates a conflict of interest. All of this can be determined from your plan level and participant level fee disclosures (and you should ask for a copy of each).
Your plan should be reviewed by someone who does not have a conflict of interest, who’s independent (and not compensated based on assets) and a fiduciary (not someone who gets revenue sharing and/or sells products). We often do plan reviews for potential clients, but this is not an easy job especially if there are admin issues. Ideally your plan adviser and TPA should be taking care of you. If plan adviser is not doing their job (i.e. using high cost funds instead of index funds, gets revenue sharing vs. eliminating all funds that pay revenue sharing) it might be time to change the adviser – it is their job to get you the best plan cost-effectively. Also, the TPA should not be charging asset-based fees or collecting revenue sharing as well (and many often do) – and all of this is apparent from the fee disclosures.
So start with a copy of participant level and plan level fee disclosures, and this would give you a good idea as to who is compensated with what. If anyone is getting asset-based fees and revenue sharing, that’s a sign that you are getting conflicted advice.
Alternatively, you can make your salary deferral contribution into your own solo 401k plan. You might also be able to make an after-tax contribution (and convert this to Roth). This is always an option. So you would do $18k salary deferral, ~20% profit sharing, and the rest (up to your net income) as after-tax (and this amount can be rolled over into a Roth IRA).
Ok, so I can put $18K salary into individual, + 20% profit sharing = $24k. Then I could put $53k employer contribution into the practice 401k? I’ve requested the fee disclosures and have a call set up with our plan advisor next week. I’m gathering information to present to my partners so hopefully we’ll switch to a better plan.
Yes but the $53k would have to come from profit sharing for the practice plan, and that has to be part of your plan’s design, so chances are unless your plan allows profit-sharing only $53k contribution, you won’t be able to max out without doing salary deferrals as well. So I think you should contribute the max you can into your solo 401k (and top it off with an after-tax contribution up to $30k), and contribute the max you can into your practice 401k with profit sharing only.
The guidelines for having the best plan is really simple:
1) Work with an adviser who is a fiduciary (ideally a 3(38), but you really have to be on board with what they are doing).
2) Work with a standalone/independent TPA (and have adviser communicate with the TPA regularly)
3) The fund lineup should be low cost index funds that don’t pay any revenue sharing.
4) There should not be ANY asset based fees inside your plan (aside from your fund expense ratios, which should average to about 0.15% or so). There maybe several bps that record-keeper charges, but that’s about all.
5) If you have multiple brokerage windows, those have to be cleaned up (many group plans don’t have clear policies on brokerage windows – not only would this avoid having to pay extra for admin, but it would also keep the plan in compliance, as there are some potential issues that can be avoided if there is a clear policy in place)
Thank you for the free advice. I was able to get both the plan and participant fee schedules. It looks like we’re being charge 79 bps for an “Effective Management Fee” and 31 bps for “Sales Fee” for a total of 110 bps in addition to the fund expense ratios, which average more than 1%. I assume these are the asset based fees that should be avoided?
Correction, it appears that the Management Fee and Sales Fee are paid through the expense ratios, so 1.1% total fees. Does that sound right?
Management fee and sales fee are not paid through expense ratios of the funds. They are usually added to the fund expense ratios to arrive at an ‘all in’ expense ratio, so it sounds as if you are quoted expense ratios that include the 1.1% fee, in that case I’m guessing that your average fund expense ratio (with those fees included) is closer to 2%. Look up your actual market expense ratios for these funds. Then you’ll know what the total fee is. The math has to work. A typical manged fund costs from 0.5% – 1.5%, and the only fees paid out via expense ratios are 12b1 and revenue sharing, as far as I know. Revenue sharing is usually credited towards plan administrative expenses, but if it covers expenses fully, no more crediting is done to offset any other expenses (unless your document says otherwise).
Bottom line – you are getting fleeced. A typical plan that I work with has an average fund expense ratio of 0.15%, and a total asset-based fee of 0.05% (record-keeper charges this, so we can’t avoid it). A fixed fee would save your plan significant amount of money given how much a group like yours would contribute to a retirement plan.
Update:
I scheduled a phone call with the plan’s advisor clarifying the fees and ask to add some lower cost funds to the selection. During the conversation, he tried to explain to me why the actively managed funds in the plan were better than lower cost index funds, then (I couldn’t make this up) tried to sell me an annuity.
My practice is likely to merge with another group within the next 6 months and my guess is that we’ll go with their 401k. Otherwise, we’d be changing plans and advisors immediately!
I did open an individual 401k plan with Vanguard. Unfortunately I’ve already maxed out my employee contribution to my current plan but will put 20% of my call income into this plan.
Question: I understand that employer contributions can be written off as a business expense. What about employee contributions? If I contribute those to the solo401k they’ll be from post-tax money and I’m sure that I’ll have to give my accountant some guidance on this.
But of course. This is typical. However, no guarantee that the other group’s plan is any better for that matter. That’s something you might want to find out beforehand. For 1099 income both types of contributions can be deductible on your tax return unless it is an after-tax contribution. Your accountant is the one that has to give you some guidance on this, not the other way around.
I will be starting an attending job soon and wanted to ask for your advice. These are my plans. Please give your input. thanks.
I will have a full time job as an independent contractor setting up my solo 401k and making $55k contribution (or whatever max is allowed in 2016).
Additionally, I will be doing part time(expecting to make around 60-80k per year) in my university hospital that offers 401a, 403b and 457.
401a – they will be taking 7.5% off my salary and putting it into my retirement account.
457- I will be contributing 18k (I assume that this doesn’t count against my solo401 max)
403-nothing here since I’m making full contributions on my solo 401k
backdoor roths for me and spouse-
investing in real estate like crazy(my spouse’s father is very experienced in RE and will help us out).
Sounds like you’re going to be very wealthy some day to me.
Well, I by no means am an expert on this specific subject, but could you contribute the $18k max into the 403b and make $52k profit sharing contribution into the solo 401k? This of course depends on the amount of net profit from your independent contractor business.
WCI, thanks for all the great content!! I think you are going to be responsible for knocking 3-5 years off my retirement age, so thanks!!
My question is as follows: CAN I MAX ($18k) INTO 2 UNRELATED 457 ACCOUNTS IN THE SAME YEAR?
The backstory is that I am a resident Jan-Jun and then becoming an attending July-Dec at a completely different institution. This gives me access to the following accounts:
Residency in Jan-Jun: Roth 403b & 457
Attending in July-Dec: 403b & 457
I plan to contribute as follows:
Residency in Jan-Jun: Roth 403b = $0 & 457 = $18k
Attending in July-Dec: 403b = $18k & 457 = $18k
This would give me $54k in tax deferred accounts in this unique year, provided this is legal… THOUGHTS?