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.
can anyone answer this please?
Unfortunately if the outside job is as an employee you cannot use those earnings to an individual 401(k), which is for self-employed earnings only. Sorry.
DrDrDr, I agree with WCI that you can’t use the income you receive as an employee to fund your individual 401(k). If investment flexibility is what you’re after though, have you asked your employer if self-directed brokerage accounts are available in the 401(k) Plan? And if they’re not available, ask them if they’re willing to make them available going forward.
Hello. My radiologist husband has been working for various groups as an IC and contributing the max to his SEP IRA annually. One of his gigs (large hospital system) is now requiring him to become a W2 employee. They offer a 401k w/ ER match and profit sharing. He can contribute 18,500 pre tax. They are predicting the 2018 match and profit sharing will total 25,000 (so 43,500 total for 2018). But of course the max potential total is 55,000. Our questions going forward are :
1) He is still able to contribute to his SEP with his IC/1099 income (from small private practice coverage), in addition to his 401k (large hospital employer) job, correct?
2) What is the total amount he may contribute between the 401k and SEP? 55,000 total? or 55,000 from the 401k and 55,000 from the SEP (110,000 total) ?
Thank you.
1. Yes. But he should probably be using an individual 401(k) instead of a SEP-IRA because it would allow him to also do a Backdoor Roth IRA.
2. $55K in each. But if the employer 401(k) only lets him get $43,500 in, that’s all he gets. And in order to get $55K into that SEP-IRA, he’s going to need $280K+ of 1099 income. So chances are he isn’t going to be able to max out either.
I would second that he should do a solo 401k plan and coordinate contributions between his solo 401k and his W2 401k plan. This will allow him flexibility if his W2 401k plan is too expensive in terms of investments and administrative costs. So he can choose to defer $18k into his solo 401k vs. his W2 401k.
Depending on his income, he might also be able to contribute to a Cash Balance plan (provided he’s at least 37), and this will work with his solo 401k (but not his SEP). And if he’s older than 40, he can potentially contribute as much as $100k into a Cash Balance plan.
Thx for your comments. If he opens s solo 401k then he can roll his SEP funds into it correct? Then he will have a $0 pro rata basis so he may do a backdoor Roth? Thx!
Maybe, depending on where the solo 401k plan is. If you want it at Vanguard, it would have to have a custom plan document to allow that. Other service providers allow incoming rollovers.
Yes, that’s correct. Be aware the Vanguard (at least the standard cookie-cutter one) solo 401(k) doesn’t allow incoming rollovers.
Drs HH, I (or a TPA like me) can create the custom plan document for your solo 401(k) Plan. The upside of opening up the solo 401(k) with Vanguard and using their super streamlined Adoption Agreement is that it is free. A couple of the downsides are that they do not accept incoming rollovers and you cannot make voluntary after-tax employee contributions.
The advantage of using a custom plan document and working with a TPA is that you get a lot more flexibility (i.e. allow incoming rollovers, make voluntary after-tax employee contributions, loans, in-Plan Roth conversions) and you can call your TPA with questions. Do you want to do it yourself or do you want to work with someone who will calculate how much you can contribute, tell you when to contribute, and prepare the Form 5500 once the plan assets exceed $250,000?
Note you can still work with and open the solo 401(k) account at Vanguard if you decide to use a custom plan document.
The other downside of the Vanguard individual 401(k) is you have to use investor shares rather than the cheaper admiral shares no matter how much you have in a fund.
The 5500 EZ is a poor reason to pay a TPA: https://www.whitecoatinvestor.com/irs-form-5500-ez/ but you’ll need one for a custom plan document that could provide additional features.
Totally agree the 5500-EZ is not a complicated form to prepare.
Good to know regarding Investor vs. Admiral shares.
I assume a custom plan design could incorporate admiral shares, but I don’t know. With a large plan, that could offset a significant part of the cost of the TPA.
I am confused and struggling with my CPA, and have extended my 2017 taxes because of it. I had two 401(k)s in 2017, one from my K1 income to which I contributed $16,200 as an employee and $37,800 was contributed by my group for a total of 54k. (I did it this way to specifically leave more room in my “employee” elective deferral space, and intentionally NOT maxing out the employee elective deferral portion. An employer can contribute 233% of employee’s contribution, so the 16,200/37,800 split maximized this space left in my $18,000 employee contribution limit.)
Then I made $1,000 in 1099 side hustle and opened an i401(K) and directed $987 into that account. (1,000 * 0.9235 * 2.9%/2 = ~13 therefore my contribution limit was $987). But this was assuming I still had $1,800 of unused “employee” elective deferral space, which my CPA disputes. After finally convincing him I can in fact contribute >54k in total 401(k)s, he seems to think I can only contribute an employer contribution of $185. I disagree. Can I not contribute $987 into my i401(k).
Having contributed 54k in my partnership 401(k) (16,200 employee, 37,800 employer), how much can I contribute to my i401k on $1,000 income??
thank you!
I think you’re right, for what it’s worth. Bear in mind your accountant has probably never had a client with this issue before, even if it is common around here.
How much of the partnership do you own? Provided the partnership and your side hustle do not form a controlled group, I agree with WCI that you are fine to make the $987 in deferrals to your i401k as you described above.
The 401k sponsored by your Partnership and the i401(k) sponsored by your side hustle have separate $54,000 limits assuming they do not form a controlled group. The limit that is an “individual” or “combined” limit is the $18,000 deferral amount for 2017, as you stated.
I owned 1/22nd of the partnership (no longer do) and the K1 and 1099 businesses were not a controlled group.
So, where do I put the deduction on my taxes? CPA is asking me where I think he should put it, and I have no idea. Last year I maxed out one 401(k) at $53,000 and it was on line 28 of my 1040. Seems logical to me to put $54,987 on line 28 of my 2017 1040. Is that not logical? Do you have to fill out two different 1040s for 2 different businesses? He is saying ,
“only $185 is deductible, and that contribution is not deductible on schedule C. It is deductible on page 1, line 28 in addition to 54,000. ”
And then he quotes IRS schedule C instructions that state for line 19 “If the plan included as a self employed person, enter the contributions made as an employer on your behalf on Form 1040, line 28, or Form 1040NR, not on schedule C.”
Fine, but this is say “as an employER.” So where is the contribution placed as an employEE?
It goes on Form 1040 line 28, both employee and employer.
I have searched through these comments and elsewhere on the site, but can’t seem to find an answer to my situation.
Government physician with $275,000 salary and TSP retirement plan with 5% employer contribution
personal contribution: $18,500
employer contribution $13,750
I also have a part-time side job with a hospital making ~ $50,000, where a 403(b) is available, but with no employer contribution/matching. Am I eligible to make contributions to this 403(b) or not since I have already maxed out my personal contribution to TSP? Thanks in advance.
No. You get one $18,500 employee contribution no matter how many 401(k)s/403(b)s you’re eligible for. The $55K limit is per job but the $18.5K limit is per person.
Do two different unrelated 1099 side hustles require two different 401k? And if so, can they be with the same company?
Why do you think two businesses completely owned by you are unrelated? What does related mean to you? Basically, businesses receive 1099s. You are a business. All the companies that give you a 1099 are your clients. So one 401(k) for all your businesses/clients.
I also was unclear on this. You had alerted me to the definition of a controlled group (Both brother-sister and parents subsidiary) in your excellent post on multiple 401(k)s. And I opened up a solo 401(k) for some locum‘s work I do on the side. I’m now doing some real estate work on the side and I didn’t realize I would roll all profits from all sources (both medical work and real estate work) into the same business bottom line. The one thing that makes me question this, I guess, is that when I applied for my EIN, they asked me what type of business. I remember NOT choosing real estate, ( which was true at the time ) but eventually I see real estate as the majority of this business
Question about after-tax 401K contributions (not Roth 401K contributions). Assume that you have one employer-sponsored 401K which you max out in 2018 with $55K ($18.5K employee contribution and $36.5K employer contribution). Then you also have a solo 401K to which you can contribute $20K (given the 20% limitation on $100K in net earnings from self-employment). Assuming your solo 401K plan allows after-tax contributions, could you contribute an additional $35K to the solo 401K in the form of after-tax contributions and then convert this amount to a Roth IRA (again assuming your solo 401K allows in service distributions)?
Yes, I think so if the plan allows it.
What about using a second solo 401(k) that allows crowdfunding real estate investments directly as a “paired” tax protected repository for private debt and equity investment in real estate as a dedicated 401(k) for say 10% of a household portfolio?
I think a self-directed individual 401(k) can be a good option for real estate investing. Whether to pair it with a more traditional one is a good idea or not depends on the individual circumstances of the investor. In general, a single business can’t have more than one 401(k) in a given year. But if you had two businesses you owned you could have two 401(k)s. They would share the same $55K limit though.
Hello, I changed employers during the year, and I have current year employee contributions to each company’s 401k plan. Normally, I would tell the new employer how much was deducted as an employee contribution to the first employer, so that the second employer limits my deductions to 24,500 (including 6,000 catch up contribution) less the amount already deducted by the first employer. This way, my total aggregate contributions will equal 24,500. However, I know from experience that my first (former) employer will be refunding me a portion of my contributions at the end of the year when they do their anti-discrimination testing and determine that their plan once again fails the ADP and ACP tests. In the past, they had refunded to me in the range of 3k to 5k due to their failure of these tests. Thus, I’m wondering if I should target 27,500, knowing that the first employer will be deducting at least 3k from my contributions at the end of the year. What do you think? Thank you in advance. Mike
This is not a rule for all employers. Some employers want to save money on employer contributions so they play the non-safe harbor plan game. It is disrespectful to their HCE employees, to say the least. So for example if you have a Safe Harbor plan, you will not have this issue with the 2nd employer. This can be found out from your SPD, and typically if you get a 4% match, that’s a sign that your plan is Safe Harbor. If not, then you are out of luck again. How much is refunded to you will really depend on the demographics and details of the new plan, so you might want to talk with other HCEs about it before making any decisions.
Correct, my second employer is a safe harbor plan; only the former employer had the discrimination issues. But my question remains, if I can reasonably estimate that my former employer will refund say 5k of my contributions, can I go ahead and have my new employer deduct an equivalent 5k from my prospective pay, so that I can maximize my contributions as close to the ceiling as possible. In my case, I’ve actually contributed more than the ceiling, and my new employer is in the process of adjusting my contributions so that I don’t exceed the ceiling on a combined employer basis. At the end of the day, however, I will not be any where near the ceiling because my former employer is sure to refund about 5k (as they’ve done in the past few years) due to their failure of the anti-discrimination tests (ADP & ACP).
Hello I need help because I am still confused!
Here is my situation. I was was employed in partnership that offered a 401k/profit sharing retirement account until May of this year (2017). I maxed out 55k into that account before I left in May.
My new job offers 401k that I can put 18K into (no matching or employer contributions). I told them that I didn’t want to put any money in the new 401k for the year 2017 since I thought I had maxed out my 2017 IRS limit of 55K already with my old job.
From this article it appears that I shouldn’t have done that? Is it true that I can still put 18k in my new job’s 401k account (for a total of 73K for 2017)?
You only get one $18.5K employee contribution, but each job/401(k) gets a $55K limit to be made up of employee an employer contributions. So chances are you used your $18.5K contribution in the first 401(k) and can’t use it again in the second one.
That’s exactly right, so if you could have maxed out your 401k with PS only, you would have gotten an extra $18.5k contribution into the 2nd plan (plus any employer contribution).
I have been practicing for 3 years, paying my student loans down and now would like to start the catch up process for retirement.
I am 1099, and our adjusted gross income for 2017 was 370k. Married filing jointly with my husband who has his own business. Tax guy said at this point best to file husband’s business on our personal taxes. We filed an 2017 tax extension until October and will sign our tax return and file within the next two weeks. I do not have an S corp at this time and have been paying quarterly taxes on my own.
Tax guy says I could contribute 20% of my income to a SEP retirement account as a 2017 contribution which is tax deductable. If I have the funds, is this the best way to start?? Is there a better way? What about 401k? Is Vanguard the best company to go through for SEP, and or 401k?
Too late to start a 401(k) for 2017, but you can still do a SEP-IRA. What I’d do is open a SEP-IRA at eTrade, do the 2017 contribution there, then open an individual 401(k) at eTrade for 2018 contributions and roll the SEP-IRA in there. If you really want it at Vanguard, you can close the etrade one next year and roll it into a Vanguard one you open then. But eTrade is fine long term. Vanguard doesn’t allow IRA rollovers into its individual 401(k). The reason you want to use the 401(k) instead of the SEP long term is to allow Backdoor Roth IRAs.
Hi! – I am sole owner of an s-corp practice with one physician (me) and 1 np, which also has 16 part and full time employees (clinical and research work). We have a 401k with a 3% across the board employer contribution (rather than a match). My wife is a dentist who is sole owner and employee of her s-corp. Her s-corp gets 1099 income from one source, and her s-corp did not have a 401k. We do not have any side-jobs or work for anyone else. Before I opened the 401k for my corp, we thought about creating one for her company, and maximizing her contributions – but were told by accountants that would not be possible, as the IRS would look at it unfavorably, and that I had to open one and contribute equally to all employees in my corp. Since she is secretary in my s-corp, I put her on salary for her duties here, and she now is receiving 401k from my s-corp. Any advice on this arrangement? We have IRA accounts, but I am not sure I can max out 401k contributions and place 5500 in IRA. Can we also create/ contribute to other retirement accounts? We used to have HSA eligible medical insurance policies, but they proved to be too expensive, so now have a standard ppo plan through my practice. We are in a community property state (CA) if that matters.
I think that is correct in some states (community property) that a 401(k) opened by her corporation would have to include your corporation’s employees. You can both do Backdoor Roth IRAs and of course she can participate in your 401(k) too. And there’s always taxable.
This is indeed a controlled group situation. What I would suggest is to NOT have your wife get a W2 from the practice. Instead, her entity can adopt your plan and both of your entities can participate in your plan. This is the most efficient way to do it. With that many staff profit sharing might be difficult to justify, but with both of you I’d still do the design study to see whether that might make sense. Depending on your incomes (and the ages of all of the participants), a Cash Balance plan might make sense in this case especially if both of you participate and can put away significant money. Even though PS might not work, a CB plan can work because it is more restrictive and gives you a lot more contribution vs. PS. With some creative design work, % to owner is usually much higher with a CB plan added to a 401k. At the very least all of these options should be considered. I’m surprised your TPA did not advise you regarding having both entities adopting the same plan, this is standard practice as we see this happening all the time.
I’m a dentist, and in a partership (2 dentist) PLLC. We have a SEP that my partner and I contribute to for us and our employee’s, maxing out the now $57k (or whatever 2018 limits are given 275k of compensation). My wife is a teacher and we put her entire salary, which just about maxes out a 403b and 457. My partner and I each have sub s corps/PLLCs that we run all our personal expenses through. I moonlight out of state 1 weekend per month, and per the recommendation of my accountant was running my income from this through my sub s corp to avoid additional payroll taxes. Now that student loans are paid off and we are still DINKs and we have elevated into far higher than imaginable tax bracket, I’m trying to figure out if I move the moon lighting income to personal and out of the sub s corp, if I could set up a solo 401k for my spouse and I. I’ve run this by both our practice and personal accountant, and they said this is gray area (our practice accountant is incredibly aggressive), and this may still fall into the umbrella policy for contribution of the $57k maximum. Any input greatly appreciated. I’ve read the above comments and find similarities, but the SEP seems to throw the wrench for my understanding here. I also wanted to say thanks to all the above posts and responders for their expertise.
I think even if you split out the moonlighting income, the two companies would still be a controlled group. So one retirement plan only. If the SEP is the right one for your practice (and it’s hard to know without doing a study) that’s unfortunate because it keeps you from doing a Backdoor Roth IRA. You could do one for your wife though.
Even though the income comes from a practice I do not own (am a 1099), and the work is done in a different state, they still are a controlled group? Thanks for your reply! Why in your opinion do you feel the SEP prevents you from doing a backdoor roth? I have been, at the advice of multiple accountants.
The SEP doesn’t really prevent you from doing a backdoor Roth. What happens though is that when you do the second step of the backdoor Roth, the Roth conversion, because of the pro rata calculation, what you end up converting is not your nondeductible contribution, but rather a mixture of pretax (SEP IRA) and after tax (your “backdoor” contribution) dollars. Because your SEP IRA balance goes on line 6 of form 8606. So with a large SEP IRA balance what you’re really doing is a mostly a taxable conversion of your SEP IRA dollars, and leaving basis in your IRA.
For example if you try a $5,000 backdoor Roth and have $100,000 in a SEP IRA, you really only backdoor $238, and end up with $4,762 basis in your IRA.
Go ahead and try it. Complete form 8606 using your own numbers. You will come up with some small percentage number on line 10, which is all you’re squeezing through the backdoor.
I do the backdoor personally, using different funds that the SEP. They are kept completely separate. Our SEP allows 18.5k of roth 401k contribution. The $5500 backdoor roth I do personally via non deductible IRA contribution then conversion ( I don’t co mingle funds from the SEP and backdoor conversion). I’ve been doing for both my wife and I for 4 years and have not had any issues with filing for taxes.
It doesn’t matter if the funds are co-mingled. See Line 6 form 8606: “Enter the value of all your traditional, SEP, and SIMPLE IRAs as of
December 31”. IRS actually bolds the word “all” on this line.
Of course you can do your and your spouse’s non deductible IRA contribution and you can do the Roth conversion. It’s not illegal.
Have a look at your forms 8606.
Are you sure that your work plan is a SEP IRA, and not a 401k?
You say this”Our SEP allows 18.5k of roth 401k contribution.” That sounds more like a 401k plan, not a SEP-IRA.
“Our SEP allows 18.5k of roth 401k contribution.”
You can’t make 18.5k of roth 401k contributions to a SEP. Either you have a 401(k) Plan or you have a SEP, or you have both a SEP and a 401(k) Plan. But you can’t make 401(k) contributions to a SEP.
All money contributed to a SEP is made on a pre-tax basis by the employer.
There are no Roth contributions in SEP-IRAs. Maybe you have a 401(k), which is wonderful if you do because then you can do the Backdoor Roth IRA without pro-rata consequences. If it is a SEP, it doesn’t matter that they’re not commingled.
You OWN your business. The practice is a customer of your business. You also OWN 50% of your other business with your partner. Thus, the two businesses are a controlled group.
I am not sure there’s a controlled group issue here. Lots of docs maintain solo 401ks for “side hustle” income, and also have group 401k plans for their practice that they have part ownership. OP here has 50% ownership in the practice, and 100% ownership in the “side hustle”.
Looking 4 Clarity, you should consider starting a thread on the WCI forum and ask this question.
Or you can read the IRS controlled group rules, but I have a tough time following those and correlating with these situations.
50% ownership in one and 100% ownership in the other is definitely a controlled group of businesses. Now 1% ownership in a partnership and 100% ownership in your sole proprietorship, that’s not controlled.
https://www.law.cornell.edu/uscode/text/26/1563
(2) Brother-sister controlled group
Two or more corporations if 5 or fewer persons who are individuals, estates, or trusts own (within the meaning of subsection (d)(2)) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation.
(3) Combined groupThree or more corporations each of which is a member of a group of corporations described in paragraph (1) or (2), and one of which—
(A) is a common parent corporation included in a group of corporations described in paragraph (1), and also
(B) is included in a group of corporations described in paragraph (2).
Looks like the IRS cut off is 50%. So if one partnership is you, your wife, and your uncle and the other is you and your wife, that’s controlled.
If the partnership is your own sole proprietorship plus a four person evenly owned partnership, that’s not controlled.
Hope that helps.
The IRS language is “more than 50 percent”. So, are you sure? OP does not own “more than 50 percent” of the dental practice.
So if you have a 50:50 with another non-related doc, and also own 100% of another entity, that is not a controlled group and would allow you to have separate limits/plans. But based on OP’s information, if you simply split off your income from your partnership into another entity, that would result in an affiliated service group which would result in a controlled group nonetheless.
Excellent point. I think you’re right and I’m wrong. My apologies to the OP. It DOES say >50% and he only owns 50%.
To clarify to everyone here:
Current set up:
50% owner of PLLC with sub s corp. I mis spoke (see below), as our plan is profit share 401k not SEP (was changed a few years ago). I max the 57k here.
I moonlight out of state for a practice I do not have any ownership in, with 1099 income. I did it this way for 4 years. I used to be paid and run this personally, however I bought into practice last year, and for 2017 start having the out of state practice write checks to s corp. Now that I have some debts paid, I’m considering (if allowed), going back to having checks written to me personally, paying expenses related to this job personally (rather than running everything through s corp), and funding the solo 401k, plus employing my wife on a larger scale, to contribute to this via the 1099 income.
Is this more clear and seeming legal? I might get dinged for splitting, marrying, then resplitting the income.
Thanks!
You still don’t pay it “personally”, you run it through a sole proprietorship and file a Schedule C. And the contribution limit is $55K, not $57K.
income is from a practice that I do not own and am paid 1099, in another state. I was running the income through my S corp to avoid more payroll tax, however I think setting up a seperate 401k is much more advantageous, as my spouse, who helps me with all the office organization, supply ordering, travel booking, etc. and I can both get a sizable contribution.
Provided that this is not a passive income, if you set up a solo 401k for this income, you have to coordinate this with any 403b contributions. If you are taking this income via your individual S corp (which also takes in the income from the partnership), that’s a problem, because you should not commingle those sources if you want to set up a separate solo 401k plan for this 1099.
First, “My partner and I each have sub s corps/PLLCs that we run all our personal expenses through.”
This sounds like you are splitting off income from your partnership. This and your partnership are a controlled group. So you can’t set up a separate 401k for those entities. And your SEP has to cover both entities if the income into both comes from the partnership. So if you have staff, you can’t just set up a SEP for one entity and ignore the other one.
That said, if you have 1099 income independent of your partnership, you can set up an individual 401k for yourself, but this would have to be an independent entity.
Several comments on your post:
1) You should really be doing a 401k with profit sharing, not a SEP.
2) If you are old enough, you can potentially do a Cash Balance plan if you need more tax deferral space. This can only work with a 401k with profit sharing though.
3) This will allow you to also do backdoor Roth IRA contributions cleanly (which you can’t do with a SEP).
If you have no staff, this is really easy to implement. If you have staff, you probably should have already considered a 401k with profit sharing, as it is much lower cost in terms of employer contribution. Adding spouse to the payroll can help boost your contributions as well.
I don’t like that phrase “add spouse to payroll” as it implies the spouse isn’t doing any work, which is obviously fraudulent/illegal but which many doctors think is a good idea.
I’d prefer “employing your spouse, having them do real work, and paying them appropriately allows your spouse to also be able to contribute to the retirement plan, but at the possible cost of increased payroll taxes.”
I know you know the difference, but I’m not sure some of those reading your words will.
Exactly, in fact, I prefer that docs officially hire the spouse and draw up a list of duties if the spouse is working from home/not at the office.
Thank you everyone for the great responses.
The parent PLLC of our practice employs our 12 staff members, my partner (cousin) and I have sub S corps. My wife does work for my S corp, however given she is on a retirement plan from work, I’m not sure she can be a part of our parent retirement plan (part of all 3 of these corporations). Now that I’m learning 457 and 403 accounts may not count towards total 401k contributions, I may be able to increase her workload to help shield some income.
The income from moonlighting is from an outside source, and I can move it back to the entity I was running it through (personally), before I was a partner in the practice.
Yes, we have a SEP at 15% for all employees who work >1000/hrs a year (currently 8 of them, as several are part time and do not qualify). We understand that a 401k would be significantly less employer contribution and “cheaper” for my partner and I, however their wage packages of hourly + pension are combined. The SEP was conveniently set up by my father, and the large company that monitors our practice metrics said we have an incredibly generously compensated staff, however we also run a very low staff overhead relative to collections. As long as this continues, no big reason for me to change. (sorry for the aside, but some may be interested). I’m 32 and partner 38, so defined benefit plan (with 4 employee’s >55 years old), is too risky at this time.
Thanks again to everyone for the information, very helpful.
Graham
Actually, 403b does have an impact on your retirement plan contribution if you have more than 50% control of an entity. So your plan better be set up for your partnership (not for your individual S corp), or else there are multiple issues that you would be facing.
Yes, a DB plan is probably not a good idea for you given your ages.
The 1000 hour work requirement is NOT a requirement to be eligible for the SEP. It is a 401k eligibility requirement and you can not apply it to the SEP. SEP has 3 out 5 years down to 1 out of 5 years eligibility test, so if any employees satisfy this, they are eligible. So I’m already seeing some issues, and I’m sure there are probably more given that SEP is not an ERISA plan and you don’t have a TPA overseeing it.
I don’t buy that SEP is a better plan for a practice with staff. With a 401k plan you can control what you give to the staff much better, so if you want to give them 15%, that’s fine as well, but you can max out yourself with a much lower W2 using a 401k with profit sharing. With 15% contribution, you have to have a W2 of nearly $370k to max this SEP out, which is highly inefficient. Also, 401k affords better asset protection than a SEP does, and you can also do backdoor Roth with a 401k.
Kon,
You are right and I did mis speak. The retirement plan was a SEP, however when my partner bought in in 2013 it was changed to a profit sharing 401k (I can get you the exact name if it is important). I appreciate your advice very much.
Graham
The SEP doesn’t really prevent you from doing a backdoor Roth. What happens though is that when you do the second step of the backdoor Roth, the Roth conversion, because of the pro rata calculation, what you end up converting is not your nondeductible contribution, but rather a mixture of pretax (SEP IRA) and after tax (your “backdoor” contribution) dollars. Because your SEP IRA balance goes on line 6 of form 8606. So with a large SEP IRA balance what you’re really doing is a mostly a taxable conversion of your SEP IRA dollars, and leaving basis in your IRA.
For example if you try a $5,000 backdoor Roth and have $100,000 in a SEP IRA, you really only backdoor $238, and end up with $4,762 basis in your IRA.
Go ahead and try it. Complete form 8606 using your own numbers. You will come up with some small percentage number on line 10, which is all you’re squeezing through the backdoor.
There is a wealth of information in this blog post and its comments. Thank you for keeping the thread alive.
My situation:
I recently accepted a new job (paid via W2) with benefits including a 401K (5% contribution by employer but vesting over 5 years). The job does not offer me the complete breadth of my training, but offers a great work/life balance and is way better for my family. To offset the narrowed focused of clinical care, I have elected to continue working on a part-time basis (0.33 FTE) with my old employer. They, however, want me to be “employee PRN” paid via W2 with no benefits. I’ve asked to be paid as an independent contractor, but they claim this is not possible with their current malpractice provider.
With now two W2 paid jobs (one with 401K the other without) can I open an i401K and contribute to it via my part-time job? If not are there any options to squirrel away some of the pay aside from maxing out my tax-advantaged accounts (HSA, backdoor Roth)?
Whatever wisdom you can impart on this situation would be greatly appreciated.
no you can’t establish and contribute to a solo 401k from W2 wages. You could if you were paid 1099.
Check with your main job’s malpractice provider to see if they’ll cover the part-time work. If so, go 1099 there and have them pay you more.
No you can’t do an i401(k) if you aren’t self-employed. You can always invest more in taxable.
This is very helpful. Thank you for the suggestions.
no you can’t establish and contribute to a solo 401k from W2 wages. You could if you were paid 1099.
Would appreciate guidance on this scenario:
32F dermatologist, W2 employee of physician organization affiliated with large east coast teaching hospital.
RVU-based salary is in the $300-320k range
403b – check, maxing (employer does not allow after tax contributions)
457b – check, maxing
Backdoor Roth – check, maxing
Just (today) started a consulting role with local biotech company.
40 hours total over the next 12 months but perhaps more if the relationship works.
Questions:
– does it make sense to open solo 401k even if the side consulting may not be a regular thing? The current contract would be about $17,500 over the course of the year, so I believe I can only put 20% x 17,500 = $3500 (with $0 for employee contribution since I’m maxing the 403b)
– does solo 401k allow me to make after-tax contributions? Would it make more sense to make after tax 401k contributions or Roth contributions into the solo 401k?
– for solo 401k, I understand that I would be able to contribute max $55k – $18.5k = $36.5k, correct? (Not an issue at this stage of low 1099 sole proprietor earnings)
– during conversation a colleague brought up that there are special tax implications for consulting roles that earn above a certain threshold and that it’s better to consult for multiple different companies rather than 1. I haven’t heard of this before – is there such a thing?
Many thanks!
Sure it makes sense. If it’s just a short term thing then just go with a free solo 401k which will allow the ~20% profit sharing contribution
A free solo 401k will not allow after tax contributions.
If the income might be ongoing at a small-medium level then you may consider a custom solo 401k which allows after tax contributions. This effectively creates bonus Roth space, via the so called Mega backdoor Roth. There are several vendors that can provide such a plan.
For solo 401k you have zero salary deferral remaining. But you could theoretically max a plan to $55k with profit sharing and/or after tax contributions depending on sole prop income level.
Regarding your last question, no clue.
Thank you!!
Yes.
If you get a custom plan design you can get that feature. But the off the shelf ones like mine at Vanguard doesn’t. You have a misunderstanding of Roth vs after-tax. The only Roth contributions are the employee contribution, which you used in your 403b. So that isn’t an option. With a custom plan, you could do after-tax and heck, might as well have that plan allow you to do in plan Roth conversions of the after-tax contributions if you’re going to pay for a custom plan. So in that case, yes Roth would be better than after-tax. Remember earnings from after-tax contributions are taxable just like earnings from pre-tax contributions. Only Roth earnings are tax free.
I have no idea what your colleague is referring to.
Hello, thank you for the informative post! I’m hoping someone can answer this question-
If I am a K1 partner at my main job which provides a 401k (with a max of 20% of my income, or $55K contribution from myself as both employee/ employer- whichever is lower), and on the side am a W2 employee elsewhere (earning about 20,000 / year at the side job) at a group that also provides a 401K, is my total contribution limit to both 401ks $73,500 (possible 55K from 1st job + 18,500 from 2nd job)? Or is it total 55K from both sources combined?
Thanks for your insight.
$73,500, assuming no match from the employer.
Is there still a limit of $18,500 as “employee” contribution total between the 2 accounts? The schedule K1 I receive doesn’t differentiate between employee and employer, just the total amount.
$19K this year ($25K for 50+.)
I’ve had a similar issue. It turns out my wacky partnership 401(k)/PSP doesn’t even let us do employee contributions. Never mattered until this last year when I went part-time but now I can’t max it out. I don’t make enough practicing medicine to do so.
You’re going to have to keep track of all this yourself and make sure you’re not overcontributing, but having made contributions >$55K (and some years MUCH greater than $55K) for the last 6 years or so, I don’t think this is a particularly hot audit issue. I wouldn’t lie awake at night worrying too much about it. Use the employee contribution amount in the 401(k) that benefits you the most.
I know little of partnerships but it may have to do with how you’re paid, whether guaranteed payments vs distribution of profit. My understanding is that employee contributions can only come from guaranteed payments. So if the partnership chooses to only take distribution of income (which maximizes QBI deduction) and no guaranteed payments then you can’t make employee contributions to the plan. At least according to spiritrider
see this post: https://www.whitecoatinvestor.com/forums/topic/partnership-advantage-over-s-corp-practice-setup-with-199a-deduction/#post-155819
Certainly guaranteed payments don’t qualify for the QBI deduction. I thought ordinary business income did qualify for retirement account contributions though. They should since you’re paying payroll taxes on them, but I suppose it’s possible they don’t.
This is actually a plan that’s not a 401k. It is profit sharing only without the 401k part, and these are old plans that used to be funded with profit sharing only. There is no reason to do this in this day and age. For one thing, you can better control your W2 (vs. distribution), as it takes a lower W2 to max out both employee and employer contribution, and also because you can not do catch-up with this type of plan, not to mention that this plan is not going to work well with a Cash Balance plan if you have a small group and your PS contribution is limited to 6%.
You’re talking about mine? You may be right, but it’s also entirely possible that the folks telling me about the plan have no idea what they’re talking about. The plan document doesn’t specify, but get this…it does allow Roth 401(k) contributions. Which can only be “employee” contributions. So I think they’re mistaken. We have a new advisor for 2019 and my allowed contributions will be even lower than for 2018 so I’m not all that worried about it.
Yes indeed, I sometimes see big groups get very confused about their plans. Talked to a number of such plans, and the bigger the group, the more confused they are because the plan is run by CFOs who rarely know much about retirement plans.
I’m not sure what to send you to look at besides the plan document which specifically says:
Then later it says
It doesn’t make sense to me, but that’s how the plan document reads. I have no idea why someone would design a plan that way. It’s like having a plan that doesn’t allow loans, or Roth contributions, or a mega Backdoor Roth. Why not?
Looks to me like an old document that probably wasn’t even updated with the right numbers. Probably created by lawyers who think they know everything. Usually you can elect either Roth or tax-deferred salary deferral, I’ve never seen a plan where it is Roth or nothing. But there is always a possibility that someone got creative with a plan document. You should get a copy of the adoption agreement to see what it says there.
WCI
I have been researching this subject intensely and hope you can answer some of my questions/concerns.
Thanks for all you do!
I am currently employed full-time as a physician and have a 401k plan which gives a yearly match of around 10k. I have been contributing the maximum employee deferral 18.5k since starting the plan.
I have recently started a self-employed consulting business which will likely earn 50-70k yearly. This allowed me to start a solo401k which was initially funded from a previous employer 401k rollover.
My employed 401k plan allows for after tax rollovers and I am deferring 25k of after tax dollars which I plan to rollover to my solo401k after tax account and then convert to Roth solo401k..
I calculated the 25k after tax contribution by subtracting the 18.5 employee contribution and the 10.5 employer match from the limit of 54k.
I do not need any of my self-employed income for routine expenses and would prefer to place as much as I can, if not all of it into my solo401k to optimize my investment opportunities.
Can I achieve this by making after tax contributions into solo401k after tax account and then converting to Roth? Is there a limit to the amount of after tax contributions I can make in light of my maximizing after tax contributions to my employer 401k? My rudimentary understanding is that the limit for the employee deferral is per individual and beyond that the limit is per plan. Lastly, what would be the limit on after tax contribution to my solo401k? I’m turning 50 next year. Would it be 59k?
your after tax contributions to your solo 401k are only limited to the lesser of 1) compensation or 2) the annual plan addition limit
your after tax contributions to your W2 401k have no effect on your solo 401k
if you make any employer (profit sharing) contribution to your solo 401k, this lowers compensation and counts of course toward the annual addition limit
you can use The Finance Buff’s excellent spreadsheet to calculate your allowed contribution (including after tax) to your solo 401k
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
you have to change all the inputs above including updating the social security wage base, and annual addition limit to reflect current figures. If you want to do all after-tax, change profit sharing to 0%
all of this of course presumes you have a custom solo 401k which allows after tax contributions. The typical free brokerage offerings of course do not.
also, regarding your after-tax rollover from your W2 plan – any particular reason to move this to your solo 401k, rather than to a Roth IRA? Personally I would go Roth IRA just because I figure the solo plan already has enough complexity. Your stated plan is certainly doable. But rollover out to a Roth IRA is also an option.
My solo 401k plan allows for after-tax contributions which I can convert to Roth. It also allows for alternative investments in real estate, life settlements, litigation finance etc.
Interesting 401(k). Custom designed?
Most off the shelf individual 401(k)s don’t allow after-tax contributions or rollovers. You’ll likely need a custom plan design to do what you want to do. Whether that’s worth it or not (compared to just investing that same amount of money in taxable) is up to you.
I think the 2019 limit on total 401(k) contributions (employee + employer) is $55K + $6K catch up for those over 50 for a total of $61K.
I’m curious whether a person can contribute more than what they make in self-employed earnings into an individual 401k as long as it’s below $18.5K.
No. Contributions are limited to 100% of compensation
No.
I am an ER doc in CA. Workaholic. I have one job as independent contractor with one company, I also recently started working with Vituity and still trying to figure out their benefit plans if any. I have been with TeamHealth for a long time but TeamHealth recently changed to W-2 model in California.
My question: could I potentially contribute to THREE 401 K plans?
Thank you. Love the site.
Yes. As long as the employers are all independent- i.e. you, Vituity, and TeamHealth. Be aware you only get one $19K EMPLOYEE contribution. Everything above and beyond that has to be employer money. In reality, it would be very rare that you’d get $56K into all three.
Amazing how this thread keeps going 3+ years after original post. The original post is great with all the examples, I’ve probably re-read it at least 5 times. Maybe I’m just getting older with some cognitive decline but STILL not confident I understand it completely.
My spouse’s situation:
Job #1 – partnership 401k – $55k contribution (I believe none of this is considered employee contribution since nothing is deducted from paycheck)
Job #2 – VA TSP (401k) – $18,500 contribution
Job #3 – 1099 consulting (different employer than above 2, different duties) – ????
Currently contributing to back-door Roth IRAs yearly.
What options available for Job #3? My understanding is that can no longer open a solo 401k since employee contributions already made to Job #2 (i.e. the VA). Is a SEP IRA an option and the only option? If not, what else?
Thanks so much!
1. You should verify that 100% of contributions to partnership 401k are employer contributions / profit sharing.
2. Employee deferral is used up in the TSP.
3. With self employment earnings you can establish a solo 401k and make an employer contribution of up to 20% of net self employment earnings (self employment business profit minus one half of self employment tax). The plan must be open by 12/31 to make a contribution for that year. You have until the tax filing deadline including extension to actually make the contribution, but the plan must be open by 12/31. If you can’t get that done, you could open a SEP IRA for tax year 2018, deadline is tax filing deadline, make the same employer contribution as you would have for the solo k for 2018. Then establish the solo k in 2019 and rollover the SEP IRA into the solo k before 12/31/19. Make 2019 contributions to the solo k, not the SEP. In doing this, you won’t have problems continuing to do backdoor Roths.
Thank you @ jacoavlu!
I asked my accountant to verify and his response was: “The only plan for #3 is a SEP or Keogh Plan. You have already taken the maximum 401K por 403 (B) that is allowed. ”
So what you are saying is that I do have an option to do a solo 401K since it is an EMPLOYER contribution whereas in Job #2, that is an EMPLOYEE contribution?
It appears to me the benefit of doing a solo 401k vs SEP IRA is that it eliminates the need to rollover the SEP IRA into the 401k so that I can continue to do backdoor Roth IRAs? But the overall contribution amount will still be the same (20% of net self employment earnings). The benefit of the SEP IRA is the later deadline. Am I missing anything else?
Thanks again!
I went through a similar dilemma earlier this year. If you are already maxing all these avenues out, given the fees to set up, administer, plus increase your chance of audit, just pay the taxes and do after tax investing (and hopefully diversification).
Yeah, there is something to be said about keeping things simple, especially if the amount earned is not a substantial amount. I figure if I can save at least $1000 on taxes, it’s probably worth it for me.
Just my opinion, like I said from going through very similar calculations, but you will want to be saving at least $6000 in taxes to make it worth it. If you are doing all this with the chance of screwing up all your retirement plans, just work one more day/year and invest that full days wage after tax. Way less risky.
Your opinion on simplicity is reasonable. But not reasonable with regards to expenses. Solo 401ks are free. And unless you can cite a source I don’t believe the increased audit risk.
What you read on the IRS website or this forum is slightly different than reality when participating in multiple plans (I’m in a very similar situation to you, so I feel I have some basis to what I’m stating). The max you can contribute tax deferred is 55k, which you are getting in your partnership plan. (Govt plans such as 403 and 457 do not count, go figure). Even though you have multiple unrelated income sources, 2 things come into play. One is how you own the partnership (though a corporation or personally), as well as how you take the consulting income. I won’t go into the ownership here, but know it has an effect on how to administer a solo 401k. The only way to do a solo 401k is through a profit sharing solo 401k, and the additional amount is 20% of compensation you can do tax free (you may be able to get to 25% depending on how the solo 401k is structured). Set up fees for this range from $800-1600 plus a yearly maintenance fee to file the appropriate paperwork on your taxes. I have about $80k of outside income, and could split some with my wife on the payroll, but when you factor in payroll taxes vs taking as distribution through other corporation, the set up and maintenance costs, etc, to save maybe $3000 in taxes, when already maxing our every other vehicle, you have to decide if it’s worth it…… hope this helps I can try to the best of my ability to expand on this. Our practice has a CPA/financial advisor/attorney group we pay a flat fee per year and I ran this through them, and this is what their attorney came up with
Graham, I’m sorry, but a solo 401k can be free. Even a solo 401k with profit sharing. From the mainstream providers like Vanguard, Fidelity, Schwab, E*TRADE, TD Ameritrade. Of course it’s not free if you ask a CPA, attorney, or financial advisor for help. But if you do it yourself, it’s free. Many of us do this, including me. My practice has a 401k. And I have a solo 401k for non-practice 1099 income.
jacoavlu
You seem like an expert on 401k issues.
Would appreciate your opinion on this scenario…
Two jobs-self employed (60K/year) and employed (300K/year)
solo 401k for self-employed job-allows for alternative investments
employer 401k
maximizing pretax employee contribution to employer plan with an 11K match
Desire to make maximal after tax solo 401k contributions to eventually convert to Roth solo 401k. I’m uncertain as to what this maximum would be. Could I contribute the 56K limit as solely after tax dollars? Would the 25K pretax employee contribution made to my employer 401K along with the 11K match need to be considered in this?
Thanks!
So you put $25K + $11K into the employer plan for a total of $36K. (You’re 50+ it sounds like)
You can put about $12K into the solo 401(k).
Total is about $48K.
That’s not correct, other than the point about how you’re a member of the partnership does matter.
Unfortunately, as you’ve noticed, there are a lot of people out there who don’t understand this, including accountants and attorneys.
There’s not a lot of risk here, but there is some hassle. I wouldn’t do it for a tiny contribution unless I had a need for an IRA rollover to facilitate backdoor Roth IRAs.
There’s also the asset protection and estate planning benefits of using a 401(k) over a taxable account.
A surprising number of CPAs don’t have a good understanding of solo 401ks. And your CPA may not understand that having a SEP IRA screws up your backdoor Roth IRA.
You need to confirm the particulars of your situation, to make sure that you’re not making excess employee contributions to multiple plans. No one is going to stop you from doing so. Job 1 doesn’t know what you’re doing at Job 2 and Job 3. That’s on you to make sure you don’t exceed the annual deferral limit – $18.5k for 2018, $19k for 2019.
But the ability to establish a SEP IRA and make an employer contribution is no different than a solo k. A solo k is more advantageous for you. And contrary to what Graham says, there aren’t fees to set up and administer, nor any increase audit risk that I’m aware of.
The one thing to be really careful of is not to make excess employer contributions to the plan. That’s bad. So you need to double and triple check numbers and make sure you understand what you’re doing.
Replying to Michael’s post above (I can’t find a Reply link under his)
I’m by no means an expert.
If I understand you correctly you will use up your salary deferral limit ($19k in 2019) in your employer 401k, and receive an $11k match
Your solo 401k will have a $56k annual addition limit in 2019, but since your deferral limit is used up already, the only contributions to the plan can be employer (profit sharing) and/or employee after tax non Roth contributions. After tax contributions are only subject to the lesser of 100% of compensation, or the annual addition limit.
You don’t have to do any profit sharing.
If you do zero profit sharing, with $60k of self employment business profit, you could do $56k after tax contribution to the solo k (assuming you have a custom or semi custom plan that allows after tax contributions).
You may find this spreadsheet from The Finance Buff helpful in visualizing different scenarios. You enter your W2 job earnings, deferral contributions to your workplace plan, self employment profit, and desired profit sharing (0-25%).
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a&mode=html
Thanks for helping me understand this.
I suppose that’s true. You could get a custom plan and do a Mega Backdoor Roth IRA. But the max for tax deferred contributions to that solo 401(k) with $60K in profits and your employee contribution used elsewhere is $12K.
Your accountant is wrong. Yes the contribution amount is the same for a 401(k) employer contribution and a SEP-IRA contribution.I think you’ve got it.
Your accountant is wrong. Yes the contribution amount is the same for a 401(k) employer contribution and a SEP-IRA contribution.I think you’ve got it.
Thanks for the information. Can you help me see how this would apply for my situation (which i believe is relatively common among physicians).
I work for a non-government multi specialty group and contribute the maximum amount allowed by the employer. I also speak for various pharma companies and do online surveys. The total of this self-employment income is around $28,000 per year. Can I set up a SEP-IRA for my self employment income (even though it is from different pharma companies and survey companies?). If I want to also contribute to the roth IRA and set up a backdoor IRA as you have documented will this be deducted from the SEP IRA funds or is it completely separate?
thanks for your help
Rob
You could set up a SEP IRA for your “side” income. I’m assuming all this income is 1099 income, and you operate as a default sole proprietorship (no S Corp). All the 1099 income is lumped together for purposes of a SEP IRA.
However, a SEP IRA is going to interfere with a backdoor IRA because the SEP balance shows up on line 6 of form 8606 and will result in pro rata taxation of your backdoor conversion.
It is this reason that a solo 401k is better for your situation. The contribution limit (20% of net self employment earnings) as an employer contribution to the solo k is the same contribution limi as a SEP IRA. But with the solo k there is no interference with the backdoor Roth.
You can set up a solo 401k for free with about any mainstream brokerage.
Appreciate the comment, unfortunately I did not set up a solo-401K prior to the end of the year deadline. I assume that this means that by going the SEP-IRA route I can still make the contributions but will have to pay taxes on the $5500 backdoor roth? This may be the best option at this point. It also seems like the solo-401k’s all have some set-up and maintenance fees so it amy all work out to be the same?
Is my math below correct then:
1) Main employment: max out $18,500 individual + supplemental contribution (which the employer takes out of my salary and makes on my behalf, extra $29,000) + cash balance plan. I assume these do not affect the 1099 amounts I can contribute, right?
2) For 1099 income: SEP IRA total of ($18,500 employee contribution + 0.20 ($9,500) —that is 28,000 income from 1099 – 18,500 employee contribution = $9,500) –total of $18,500 + 1900 = $20,400 max contribution to SEP-IRA
3) backdoor roth-ra: $5,500
you are correct in that you can’t make 2018 contributions to a solo k unless it’s open by 12/31/18
if you have a non zero SEP IRA balance on 12/31 of any year in which you also do a backdoor Roth CONVERSION in that calendar year then the conversion will be subject to pro rata taxation
so to avoid this you want to:
1) open a SEP IRA for 2018 contribtuions. You have until tax filing deadline including extensions for this
2) I would open this so that the SEP IRA contributions aren’t mixed with any nondeductible IRA contributions you’ve made / will make. So maybe use a separate institution?
3) open a solo 401k in 2019. Don’t use Vanguard because their plan doesn’t accept a rollover
4) rollover your SEP IRA to your solo 401k. By doing this, your SEP IRA balance should be zero on 12/31/19
5) make 2019 self employment income contributons to the solo 401k.
By doing this there is no interference with backdoor Roth in 2019 nor in the future
Regarding your contribution amount to your SEP IRA. Your math is wrong. The SEP IRA contribution, and employer contribution limit to a solo 401k, is 20% of net self employment earnings. Which is self employment business profit minus one half of the self employment tax. The amount is going to be more like $5,500. Depends if you have any expenses to deduct against that $28,000, and depends on how much you make in your day job, because that factors in to the calculation of your self employment taxes.
You can use this calculator: https://obliviousinvestor.com/solo-401k-contribution-calculator/
You should also verify that your workplace plan is a 401k. If you participate in a 403b then report back because that makes things a bit more complex
I’m think I’m going to stop replying to posts on this thread! Jacoavlu has all the questions answered correctly before I get to them.
Hello JACOALU. I have a similar question below and, being that you seem to have a good handle on SEP / Solo 401-K issue I’m hoping you’ll respond to post 203. Thanks!
What a mess. I can’t recall if you did the conversion in 2018 or not, but if not, it’s still pretty easy to fix. Otherwise, the pro-rata rule is going to kick in. UNLESS you haven’t yet contributed to the SEP-IRA for 2018. The question on 8606 is how much is in a SEP-IRA on that date. If you do your 2018 SEP IRA contribution in January 2019, you can still put zero on line 6 of form 8606 and avoid getting pro-rata’d.
Do yourself a favor and use an individual 401(k) instead of a SEP-IRA.
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
Really fantastic thread. My apologies if my question was previously answered. But here it goes:
I have a pre-existing solo 401k (from prior locums work) and my wife and I have also been doing yearly backdoor Roth conversions.
For 2019, I will make a Defined Benefit contribution through a practice I am now a partner of. The practice is structured as a partnership of individual S-corps, and there is no practice 401k plan.
So could/should I continue making employee and employer contributions to my solo 401k plan on the basis of my S corp in 2019?
Many thanks!
Weird that there is a DBP and no 401(k). That’s an odd structure.
But no, you can’t use an individual 401(k) if you’re in a partnership. All partners have to use the same plan.
This happens sometimes, often when the cost of employer contribution is very high if there is staff. However, I would highly recommend adding a 401k plan for the practice, especially if there is no staff. If there is, it might also benefit more than it would hurt because you can optimize employer contribution better with both plans in place.
I don’t understand Rule #1. if the limit is 18k for employee contribution, how does one get to 55k as in the first line of Rule #2? its like rule one says something, and then the entire article states otherwise. what am i missing? i dont get it? i ask because my wife has been putting in her max in her work 401k (18k), but does that mean she can make additional contributions? can i contribute to it?
read the first line of rule 2 again; an employer can also make contributions to the plan
ok. so if i put in the max 18k, the only way to get to the 55k is to have the employer make up the rest? what am i missing? what employer would do that, unless the person was the owner? my wifes hospital matches 6 or 7%. even it was 100%, it still doesn’t get even close to the 55k. everywhere i read it seems so easy to get to this 55k number, but im just not getting it.
employer contributions (match, profit sharing) could fill the plan, and some plans allow for employee after tax contributions – these are different than elective (salary deferral) contributions and don’t count toward the deferral limit ($19k in 2019). You should review the Summary Plan Description to see if after tax contributions are allowed
Yes it’s much easier to reach the annual addition limit ($56k in 2019) if you are both employee and employer (an owner).
Yes. I agree that most employers don’t do that. One benefit of self-employment.
I’m looking to rollover my employed 401k into my solo 401k without leaving my job. I’m 49 years old. I’m wanting to do this to diversify into alternative investments which my solo 401k plan allows. Has anyone successfully pulled this off? Any advice is greatly appreciated.
At your age before separation from your employer, only certain distributable amounts would be eligible for rollover, not your entire 401(k) balance. I am not an expert. But distributable amounts may include profit-sharing, safe harbor, after-tax non Roth contributions.
Employee elective deferral contributions definitely not distributable for you.
Most plans don’t allow in-service withdrawals/rollovers. But if yours does for some weird reason, go for it.