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.
I read all the rules, but still have a question regarding my solo-401k. I currently have an employed hospital position and Locum occasionally on the side.
The employed hospital offer a 401k (with Roth option, I do up the 6% which is match and the 4% in the Roth option to max out to $18500), as well as a 457B which I also max out at $18,500.
I have also worked for about $60,000 as locum for 2018 and have a solo-401k, what is my max allowable contribution to the solo-401k would it be $55,000 still, or that minus what I already contribute in the 457B (55,000-18,500).
I am also doing the backdoor Roth as well and HSA
You can disregard the 457b for this discussion.
You get one employee elective contribution limit across your employer 401k and solo 401k, $18,500 for 2018, $19,000 for 2019.
It is unclear to me if you contributed $18,500 to your employer 401k for 2018. Employer match amounts don’t count toward that figure.
Assuming you did contribute $18,500 to your employer 401k, then you have no deferral amount left for the solo 401k but you can make an employer contribution of 20% of net self employment earnings.
Use this spreadsheet from The Finance Buff to help you calculate that precise amount:
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
The Oblivious Investor also has a calculator that you can use to double check:
https://obliviousinvestor.com/solo-401k-contribution-calculator/d
Assuming that one is not in need of further taxable income deduction, after tax contribution and subsequent Roth conversion makes great sense. It is not limited by income the way employer contributions are and is only limited by the 401k contribution limit, $56,000.
After tax contributions are still limited by income, cannot be more than the lessor of 100% of compensation, or the annual addition limit. The spreadsheet I linked above also calculates an allowable after tax contribution.
It would seem like he makes enough in locums work to come close to maximizing his 401k after tax contribution. From my calculation he would need to earn well over 200k to maximize employer contributions. I will check out the calculator you linked.
Agree.
Sure, after tax contributions and subsequent Roth conversions (mega backdoor Roth) is great, unless you’re passing up tax-deferred to do it (or more likely, your plan doesn’t allow both after tax contributions and inservice conversions.)
For my solo k, I do actually pass up some tax deferred profit sharing (low 4 figure amount) in favor of making only after tax contributions (with subsequent in plan Roth rollover).
We’re not talking large amounts, nowhere near an annual addition limit. But making only after tax contributions results in more dollars in the plan than making the max allowed profit sharing contribution followed by after tax. Because the employer contribution lowers the compensation number. In the 24% bracket I’ll pay that tax for a little extra backdoor Roth space.
It would be limited by your income, so only ~$12K. 20% of the self employed income. The 457 has nothing to do with it.
I always appreciate the real world scenarios in which we can actually appreciate the fruits of said example, IE example two lol.
I do part-time work from home for several different employers:
For two of my employers, I am classified as an independent contractor and I receive a 1099. I have been deferring a portion of my 1099 earnings into a i-401K plan.
I also do similar work for the Veterans administration. Although my position is classified as part-time, temporary and intermittent so I am not eligible for any benefits, I am still considered “employed” and receive a W-2. Are there any other retirement plans options for my W-2 earnings other than a non-deductible traditional IRA (total earned income is above the limits for a deductible traditional or ROTH IRA) which I then rollover to my Roth IRA?
Thanks
No.
Hello,
I’m a 38 y.o. married (no children, 1 on the way) Nurse Practitioner with an S-Corp. I will get at least $225K (pre-tax and not considering business deductions) as a 1099 from the prison job. I’m a bit confused about calculating how to calculate my SEP contribution but I’m hoping I can max out at $56K by staring a solo 401-K for 2019 anyway.
I work as a W-2 one Friday per wk at an Inpatient Psych Facility and will make $55K (pre-tax). The Inpatient Psych Facility won’t give me a 401-K unless I work 1,000 hrs in a year so I don’t qualify. 1) Am I able to create my own 401-K for the W-2 income without the assistance of the facility? 2) If not is there any other option (I think you answered this in the post above.)? 3) The post above seemed to indicate I have a tradition IRA option for this income. Is that correct?
I work 2 Saturdays a month as a 1099 at Nursing Homes making 18K (pre-tax). They don’t have a 401-K. 4) Am I able to use this income for some retirement vehicle without the assistance of my employer?
I will put $3,500 away for 2019 in an HSA (My wife has good healthcare benefits from work and I believe it is best to keep that rather than have a family HSA. Please correct me if I could be wrong).
My wife is a W-2 making $114K annually. She maxes out her 401-K (19K for 2019) and gets 100% match for the first 3% of salary and 50% match for the next 2% of salary up to 5% of salary.
I don’t have a Traditional IRA or a Backdoor Roth IRA.
After reading your 1099 401-K vs SEP article I am currently in the process of transferring my funds (my SEP, old Roth IRA that I’m no longer contributing to, and my taxable account from my broker (who charges a 0.5% portfolio fee) to Vanguard. I have set up a Solo 401-K at Vanguard for 2019 contributions, which will make it easier to meet the 56K max).
I believe this is my current breakdown:
• Solo 401-K: $56K [$19K employee contribution (me) and $37K employer contribution (also me)]
• HSA: $3,500
• Total: $59,500
• Wife 401-K: $19K (plus $4,560 match) = $23,560
• Wife total: $23,560
5) Did I make any incorrect assumptions about what I can or cannot allocate to retirement funds?
6) Is there any advice you have about restructuring my life to better take advantage of retirement vehicles?
7) Is hiring my wife as a managerial employee of my SEP a reasonable option to give her a retirement plan?
8) Is there any good reason to roll over my SEP into a Solo 401-K (I’m aware I can’t do that at Vanguard.) or should I just roll over my SEP directly into Vanguard and start the Solo 401-K solely with 2019 contributions?
I was planning to pay myself $72K as a W-2 through my S-Corp. Reading some of these responses I’m concerned that could be too low 9) Am I better off keeping the SEP and keeping my wages low to diminish taxes? (I’m not sure what taxes I diminish aside from payroll taxes but I’m curious to know) 10) Am I supposed to have higher W-2 wages even when using a SEP in order to max out the SEP or does it not matter with a SEP?
11) Do I need to consider getting rid of my S-Corp? I keep reading that it might be a good idea but I’m not sure I understand why.
You should start a post on the forum. Much easier to unpack a multifaceted question.
Agreed. Especially now that there are 839 comments underneath this post.
Ok, I posted in the forum. I sure would appreciate your commentary / contribution.
I don’t know how much work you’re doing or what work you’re doing but for a full time doc I wouldn’t claim a salary of only $72K.
I generally don’t recommend a SEP over a solo 401(k). But putting money in either one isn’t going to reduce your payroll taxes, the only taxes saved by being an S corp.
Yes, you need a certain amount of salary to max out a SEP, and $72K isn’t enough.
Maybe. Due to the new 199A deduction there are some situations where it made sense a year ago to have an S Corp and no longer does. The devil is in the details and I have none.
I’m a little confused as to why you aren’t sure about what my profession is and why you think there aren’t any details. Is it possible you only saw a small segment of the post somehow? My post starts at 203. If I’m mistaken please let me know what additional details you need and I’m happy to provide them. I would like to make sure I give enough detail prior to posting in the forum.
As mentioned above I’m a Nurse Practitioner. I specialize in psychiatry specifically. I believe I’m one of the highest paid nurse practitioners in the world but I could be wrong. I’m putting in 50 – 58 hrs per wk. If I google the average nurse practitioner salary I see $105,757 as of January 16, 2019.
On a side note, for me, you’re one of the most influential financial educators around right up there with Bogle and Buffet. Thank you for doing what you do!
Ahhh….bear in mind I read comments in a different place on the site than you do. There are 1500 posts on the site and the comments are listed on the backside of the site in the order they were made. So unless I go to the post itself and read up, I don’t see all that info.
9) You could put more into the solo 401(k) than you can into the SEP with your salary set at $72K. But you’re going to need to double that salary to max it out and would need almost all of that 1099 income to max out a SEP.
10) It’s up to you and how much you want to save, but with you talking about maxing it out, you’re going to need a higher salary to do that. You understand the calculation, right? It’s 20% of your net profit (net of the employer half of payroll taxes) for a SEP-IRA. With a solo 401(k), it’s $19K (if under 50) plus 20% of your net profit. So on an income of $72K, you can put $19K in there as an employee contribution plus 20% of the remaining $53K, or just over $10K, for a total of $29K. With a SEP, you can put in 20% of $72K, or just over $14K, less than half as much. So in order to max the thing out at $56K, you’ll need to make at least $38K*5= $190K in salary. That’s obviously going to involve a much higher SS and Medicare tax payment each year. You’ll have to decide if it is worth it. But honestly, I think claiming just $72K of $200K+ as salary is asking for an audit.
11) It’s the 199A thing. Your deduction is limited by your salary. Everyone is still wrapping their head around this point, including me. Watch for a post later this year on it.
10) Since I’m a S-Corp is that 20% figure actually 25%. I’m a bit confused because, in question 51 above, you commented on this stating that the figure is 20% not 25%. Here is a link to my comment about it in the forum: https://www.whitecoatinvestor.com/forums/topic/multipl-401-ks-sep-self-employment-s-corp-paying-self-a-w-2-1099-hsa/#post-186109
jacoavlu replied telling me I’m actually to use 25% because I’m a S-Corp not a self employed individual. https://www.whitecoatinvestor.com/forums/topic/multipl-401-ks-sep-self-employment-s-corp-paying-self-a-w-2-1099-hsa/#post-186130
Now I’m confused.
Yes, it’s 25% of your salary. But the business must also make enough to cover the contribution in addition to your salary. So if your S Corp only makes $150K and pays you a $150K salary, how can the business also put in 25% of that salary as a 401(k) contribution? It can’t. So the business must make at least $187.5K for you to get a $37.5K employer contribution. Thus, 20%, just like it is for a sole proprietor. It’s really the same number.
Hope that helps. Presumably you’ve got plenty of business income if you’re an S Corp so that won’t be a problem and all you’ll have to think about is 25% of your salary.
Okay got it. Thanks so much.
I think the max employer contribution is $37K for 2019 though isn’t it? So the business would needs to make $185K I believe no? Not that it matters. You’re right in that I’m well above this mark.
No, the employer contribution can be all $56K. But the total contribution is only $56K, so if you put in $19K as an employee contribution, the employer contribution can then only be $37K.
I am a hospital employed surgeon with traditional employer retirement plans. I also have a solo-401k as a sole proprietor for any 1099 income from consulting/teaching. My prior hospital-employed plan was a 403b with a 100% match of my contribution, and a 457b, I maxed out all, hitting my $54,000 or so annual limit (my 18K into 403 b, 18K employer match into 403b, my 18K deferral into 457b for example). My sole proprietor 1099 income isn’t a ton, average $10,000/year. My accountant told me I could only contribute the employer contribution, 20%, to the solo-401K, so in this example, I would put $2,000/year in. Our hospital has been bought out, so my 457b is going away (big blow), but I will now have an employer 401k instead of 403b. My understanding is that the 401k is treated differently than the 403b so I could now put my entire $10,000 sole proprietor income (up to 55K actually) into the solo-401k with an additional 20% employer match ($12,000 total). Is this correct? Thanks a ton, your website is awesome.
No. You still only get $2K. Sorry. You’ll have to invest the rest in taxable. In your situation, it really doesn’t make a difference whether it is a 403b or 401(k).
Thanks!
I deeply appreciate all the great information on this site. Unfortunately, after I set up my solo-401K in 2017 at Schwab, they erroneously informed me I needed to make my solo-401K contributions by the end of calendar year in 2017, rather than by my filing date April 15, 2018. Since there are so many different rules regarding retirement accounts, I assumed that they knew best, but now know the information I was given was incorrect.
Although I did not make very much as an independent contractor, I wanted to maximize my contribution due to other earnings which put me in a high tax bracket. Therefore, I originally calculated my 410K contribution using my projected 1099-misc income –to include income I had already received, as well as the income I was supposed to receive for tax year 2017 which I had confirmed with my employers.
PROJECTED 401K max contribution was (net income – ½ SE tax): 13,465
I got all the payments I had expected for 2017 except for one check for 420.00 which I did not receive until mid-Jan 2018. Although the payroll paperwork with the check indicates the payment was for work done in Nov 2017 which was billed Dec 1 2017, the check was dated Jan 3 2018 and the employer decided to included it as part of my 2018 income rather than 2017.
Therefore, I had to recalculate my 401k contributions. According to my calculations and using the TurboTax program the maximum I was allowed to contribute was 13,054 based on my actual 1099 income received. However, I simply requested Schwab to remove 420 from my 401k and put it back into my business account in mid-Jan 2018.
Therefore, my FINAL 401K contribution was 13,045.
I did not have taxes taken out because I also determined that I had over paid my estimated taxes for 2017 and I did not need for taxes to be taken out of the excess contribution.
In TurboTax for my 2017 taxes–on schedule C I entered my total 1099-MISC income which included the excess 401k contribution, my business expenses and I entered the FINAL amount that I had contributed to my 401K:13,045.
I just got a 1099-R from Schwab for 2018 to show I took a distribution from my 401K in 2018. On the form it shows 420 as the distribution (box 1), O for the taxable amount (box 2) and Fed taxes paid (box 4) and a P code in box 7 to indicate the excess contributions was removed in a timely fashion-i.e. before April 15 and the excess contributions plus earnings were taxable in 2017.
My Question is:
Since there is no paper trail to show the original amount I contributed to my 401k i.e. I will not receive a 5498 to indicate my 401k contribution since a 5498 is only used for IRA contributions and no 5500 form is submitted since it is only completed after a 401K reach 250,000, I was uncertain if I reported my 401K contribution correctly when I did my 2017 taxes.
Or was I supposed to have entered the original 401K contribution of 13465 on my 2017 taxes and then have entered a 1099-R with box 1 showing 420 excess was removed and code 8 in box 7 to show that taxes were paid on that amount in 2017?
If I should have entered my 401K contribution with my original contribution amount on my 2017 taxes, do I now need to submit a 1040X for 2017 simply to create a paper trail of what occurred, or does the 2018 1099-R provide the IRS all the information required?
Thanks so very much for the help
I’m not sure but as long as you were only taxed once on that $420 I think it’s fine. And even if you were, how much effort are you going to put into this for $150?
My current employer offers a 403b which I fully fund to the limit and receive a 6% match. I also work as an independent contractor for a medical device company and receive 1099 income. Based on Rule #7 above, I am unable to open a solo 401k and fund with my 1099 income, correct?
Why not? You just can’t put $56K in there. But you should still be able to put something in there.
My apologies in advance but this is my first post – so not sure if this is the correct method to start a new post on this ‘multiple 401k rules’ blog:
Anyway, I am 2+ weeks into ‘opening my eyes’ up to becoming investment savvy and take control over my financial planning (do not have a financial planner, only a father who is a CPA, ha). Better late than never, I hope!
Anyway, I am married 45y/o, solo practice owner physician (LLC) with two employees (11 yrs in practice), wife is a ‘work-from home’ physician doing part-time independent contractor work (1099s), taking care of our 3 kids.
I also own solo management company (LLC) – that owns/manages the condo for my medical practice (yeah, another investment with a pretty cool and reliable tenant)
My net income (pre-tax) $325K ($300K from office, $25K from mgt company), wife’s $75K (pre-tax)
My office: SEP-IRA (vanguard)– plan to match $55K in ’19
Traditional IRAs (Vanguard) for myself/wife – both maxed $5500 each
HSA (stealth IRA; at Fidelity) $7K/yr
but after reading for the past two weeks…. trying to be a sponge!!!!!! — I ‘think’ I should/will/could do the following… is this correct and optimized??? THANKS!!!!
have my wife open solo 401k (at E-trade to get EFT Vanguard admiral index fund, i.e. very low ER) — so she can contribute 20% of her $75K: $15K; Then, open a backdoor Roth IRA for her convert $5500 Trad IRA into this (can’t open backdoor IRA from 401K at Vanguard but can at E-trade I believe)
for me:
since I own two business but they are considered a ‘brother-sister controlled group’ (i.e. solo employer in both), I can either:
1) open solo 401K but then must convert SEP-IRA into this (to avoid pro-rata rule), then open backdoor roth IRA
OR
2) keep SEP-IRA in my solo practice business (since I am grateful that I can contribute the max $55K – which means it may not be ‘less’ beneficial than a solo 401k BUT also open a Simple-IRA for my Mgt Co LLC and contribute $12K (max allowable I believe) but accept I can’t open a backdoor IRA due to having the SEP-IRA in other biz.
I sure hope I’m close…. ? Thanks again for any feedback on this inquiry.
Also a very, very grateful and sincere thank you for WCI — it is enlightening, heart-calming and invaluable to me!
Yes, your wife should use a solo 401(k), roll her IRA in there, and should do a Backdoor Roth IRA each year.
You need to get professional advice on what to do for a practice plan. Maybe a 401(k) is right, maybe a SEP-IRA is right, maybe a SIMPLE IRA is right, maybe no plan at all is right. If a 401(k) is right, you should roll your SEP-IRA and traditional IRA in there and start doing Backdoor Roth IRAs. If it isn’t, then ditch the Backdoor Roth IRA for you.
You can’t open a solo 401(k) because your business has employees. I don’t think your management company earnings can be used for retirement contributions by the way, that’s unearned income.
I will try to limit my replies to this one – as I have to assume you guys are receiving countless emails/posts per day (or minute!).
Yes – agree on the considering the employer-401K vs keeping the SEP-IRA
However, for the Management company, I understand I can’t open a solo 401k (due to the controlled group fact), but why am I not able to open a ‘Simple IRA’ for that company?
Also, to clarify – the earnings form the Mgt co are partly rent from me (that would seem to be ‘unearned income’) but also from a subleasing non-related company – which I believe would then be considered ‘earned income’ – so perhaps that would be a reason to open a Simple IRA and contribute to that (even though still can’t convert that to backdoor Roth IRA).
Thanks.
Just confirming if my follow up question/post went though? Thank you.
No, I missed it.
I don’t think the management company has earned income does it? Doesn’t it just have rent? Whether from your company or anyone else, it’s all unearned.
At any rate, even if it were earned, the retirement plan has to cover all the employees of all the businesses which you own the majority of. So you can’t have a SIMPLE IRA for you and not offer it to your employees of your other business.
Thanks! ps – I am sure you have heard this a few times… but the entire WCI is awesome! Thanks for what YOU do as well 🙂
In 2018 I worked part time W2 and essentially fulltime 1099. W2 job has a 403b plan, which for 2018 I maxed out at 18.5k, W2 employer contributed 10k to my 403b, so total 28.5k in 403b. I started a solo 401k and am trying to figure out the contribution limits. I understand that technically I can only contribute 36.5k [55k (IRS contribution limit) – 18.5k (403b employee contribution)].
Now for the 36.5k source for the solo 401k, technically it would be “profit sharing” or employer (self employed) contribution, is what I understand, also it would need to be 20% of net income (after SE tax, yadda yadda), for me that turns out to be around 33k. So I was trying to understand if there is a limit to the the employer contribution aspect, and from what I understand in this article, my W2 would have a max 55k contribution limit which is separate from my 1099 employer contribution limit, so I won’t be affected contributing the max into my 401k solo, correct?
Thanks!
No, you can contribute $55K, but it all must be an employer contribution. Sounds like you made enough to put $33K in there, so I’d do that. If you had made more as an IC, you could contribute more.
Hi WCI. Thanks for an amazing site!
Still confused on W-2 403b + 1099. Similar example as above.
Job 1: full-time W-2 403b — maxed $19k employEE contribution, no employER contribution
Job 2: full-time 1099 with SEP IRA (I know I should’ve done a solo 401k instead) — max??
If theoretically, in my 1099 I earn enough to contribute the maximum employER contribution, what is the maximum SEP contribution, is it?
a) $56k SEP (=total retirement portfolio $75k [$56k SEP + $19k 403b])
or
b) $37k SEP ($56k-19k) (=total retirement portfolio $56k [$37k SEP + $19k 403b])
Unless I’m misunderstanding, your response above and response #209 by Jeremy Palm seems to suggest maximum is $56k into the SEP for a total retirement portfolio $75k ($56k SEP + 19k 403b). However, I thought Rule #7 403(b)s Are Not 401(k)s, would mean the maximum contribution I could make is 403b+SEP = $56k.
Also does rule #7 apply to SEP vs solo 401k?
Thank you for your time.
Thomas, provided you are an employee at job #1 and not an owner, your maximum SEP contribution for 2019 is $56k for a total retirement contribution of $75k.
As you stated, this assumes you make enough 1099 income to justify the $56k contribution.
I’m not sure that’s the case. If it were a 401(k) that would be the case, but I think the 403(b) may be an exception. That’s what rule # 7 above discusses.
Got it. I’ll go back and look at rule #7.
WCI: Sure enough. I see what you’re saying. I stand corrected. That is a funky rule. Sorry Thomas!
Here’s footnote 1 from Worksheet 1. Maximum Amount Contributable (MAC) taken from IRS Publication 571:
“If you participate in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pension plans of all corporations, partnerships, and sole proprietorships in which you have more than 50% control. You must also combine the contributions made to all 403(b) accounts on your behalf by your employer.”
First, I’m assuming you set up your solo 401(k) before the end of 2018.
Sandeep wrote: “I understand that technically I can only contribute 36.5k [55k (IRS contribution limit) – 18.5k (403b employee contribution)]. ”
Separate $55k limits apply to your 403(b) where you work as an employee and your solo 401(k) where you are the owner. In theory, you have the ability to get $55k in your 403(b) AND $55k in your solo 401(k).
Sandeep wrote: “Now for the 36.5k source for the solo 401k, technically it would be “profit sharing” or employer (self employed) contribution”
As stated above, you’re not limited to 36.5k in your solo 401(k), but I agree that it would be a profit sharing contribution.
Sandeep wrote: “also it would need to be 25% of net profit (after SE tax, yadda yadda), for me that turns out to be around 33k.”
Because you’re dealing with 1099 or SE income, the profit sharing contribution would be limited to 20% rather than 25% of net profit.
Note the $18.5k deferral limit is an INDIVIDUAL limit, so you can only max that out in the 403(b) or in the solo 401(k) or a combination of the two.
Depending on where and how you set up the solo 401(k), you also have the potential to make voluntary after-tax employee contributions to it if you can’t get the $55k limit by way of profit sharing alone. This is the mega back-door Roth opportunity.
In my constant struggle to transfer funds from my workplace 401k to solo401k I started to wonder about the possibilities of how I could benefit from a 401k loan. If possible, lets avoid the lectures about the “dangers” of 401k loans. One can find that with a simple google search. No, I’m not going to buy a new car, vacation or frivolous home improvement or other noninvestment with the funds. I’m looking to invest it in rental properties and r/e syndications. Would anticipate paying back the 50K in 3-months. Could a 401k loan be transferred into a solo401k? Once paid back would there be anything to keep one from doing it again? This seems like if allowable would be a way to amplify retirement savings.
You can’t “transfer” it unless you’re otherwise eligible to contribute to a solo 401(k).
Found my answer in irs.gov section on 401k loans
In addition, a deemed distribution is not eligible to be rolled over into an eligible retirement plan.
(Reg. § 1.72(p)-1, Q&A-11 and -12)
WVI, I really appreciate the blog. I could use some advice.
I’m getting push back my group’s cpa regarding the legality of restructuring call pay to allow me to open a solo 401K. Before I push back on this, I want to make sure I have my facts straight.
In short, I’m a W2 employee for a private orthopedic group with 9 current partners/owners. I will be a partner in another year or so, at which time I will be an owner/partner and can still be paid via W2 if I choose. I’m currently in their 401K and maxing it out, doing back door roth for me and wife, and maxing out a family HSA. Once partner, I’m eligible for cash balance and profit sharing plans.
We get paid individually for call from the local hospitals, however it goes through payroll to our W2. My group is the only group taking orthopedic call at these hospitals, so they effectively pay the group for the whole month, and our payroll divides it out based on how much call each individual takes. At one hospital (hospital B), I take almost 1/2 the call, and will gross about 200K per year from that call alone. I have asked them to have hospital b pay me via 1099 for call instead of through payroll, since the payment just passes through directly to my W2 anyway. I believe I could open a solo 401K and come close to maxing out at 56K if they did so. I would have no employees for my sole proprietorship.
The CPA contended that due to affiliated service rules, and because the call work isn’t a “separate trade or business, i.e., separate from the practice of medicine in the professional corporation” such an arrangement wouldn’t withstand scrutiny from the IRS and could jeopardize the group’s retirement plan. I wasn’t told why they would be at risk. I know this doesn’t qualify as a controlled group because no one in the group has any interest in the hospital and all are equal owners of the practice. However, I wasn’t sure that, with the group being the exclusive provider of orthopedic call services at this hospital, there isnt some other hang up I’m not aware of.
Complicated situation. I think I’d take the CPA’s advice if I were you. I’m not 100% sure it’s correct, but I think it probably is. Certainly, I’m not the second opinion you need on this one, you’d need another CPA.
I think it’s probably affiliated because your group is the only one taking call there and it would be weird to have half of it paid on a 1099 to one of you and the rest of it paid to the group.
In this case, there is an affiliated group concern, absolutely. This can only be resolved by hiring an ERISA attorney though, as the CPA is not an attorney. I would err on the side of caution though.
Thank you for the prompt reply.
I agree regarding the weirdness on splitting payment, which is why I’m trying to get them to redo the contract with the hospital and pay us individually via 1099. That’s where the group CPA blocked me. My personal CPA didn’t have an issue with it.
My point is that hospital b and my group are completely separate employers with no common ownership. Only 3 people of my group take call at hospital b, and it is voluntary. So if I could just get them to pay all 3 of us on 1099, it seems like that should work.
Also, if I have no employees as a part of my sole proprietorship, am I not excluded from descrimination testing?
It just seems that based off the ASG rules, how would any physician be able to open a solo 401K when they have W2 income through their primary employer/group/hospital and who also make moonlighting or call pay from another hospital? That seems like it would always apply, since the primary employer would be a FSO and the physician would of course be routinely doing business with them and qualify as an A or B organization.
It’s not Hospital B as the second employer. You’re the second employer. You contract with Hospital B to provide services. Your group also contracts with Hospital B to provide services. What you’re proposing be done would be completely legit if you can talk them into setting it up that way instead of how it is currently set up.
But that’s not how it is currently set up and I would completely understand if neither your group nor Hospital B wants to redo the contracts at this point just to help you get an individual 401(k).
Yes, no discrimination testing would be needed.
This is truly great information. So many different sites have incomplete information, and some that’s conflicting, that to find the answer(s) to all of my questions so well laid out is a huge win!!
But I haven’t found my EXACT situation described yet:
Employer 1 (main gig): non-profit hospital:
1) 403(b) plan with employee contributions ONLY
2) Dollar-for-dollar match up to 5% of salary into 401(a)
3) Automatic additional 3% of salary into above 401(a)
Employer 2 (owner of private practice that doesn’t practice at hospital #1):
1) Salary deferral in the amount of ($19k MINUS contribution to above 403(b))
2) Company profit sharing contribution
So the question is, what is the maximum profit sharing contribution? The 403(b) *does* count toward the total annual limit of $56k, but what about the 401(a)?
Thanks again for helping everyone – myself included – know the law and the details even better than the people we hire to explain it to us!
401(a) doesn’t count. The bad news if you only get a single $19K employee contribution combined in the 403b and the 401k at employer two. But the maximum profit sharing contribution for employer 2 is $56K if the employee contribution there is zero. But you’ve got to earn a lot there to make it.
Transitioning from 1099 to W2 at the moment. My W2 Employer isn’t going to make a max contribution to my 401k like I used to do in my solo 401k. With the little 1099 income I will make, I can’t max my employer contribution to my solo 401k either. I will still max my HSA, his and her Roth IRAs, but where else can I increase retirement savings? They do offer a 457b plan and if I leave the company, I can leave it there.
If the 457 is good, use that. If you want to save more, there is no limit on a taxable account.
My wife and I would like to take advantage of a backdoor Roth IRA this year. To avoid the pro-rata rule we need to get rid of all other IRAs. My wife has an IRA that was created when she rolled over an old 403b. She checked and her current employer will not allow her to move her IRA into her current 403b account. Even though she currently does not do any independent contracting, can she open a i401k and then roll her IRA into there? If not any other suggestions on what to do with the IRA?
Thanks for all that you do.
No. You have to have a business to open an i401(k). It doesn’t have to be a huge one though. Some just do a few surveys to get some 1099 income and then get an EIN for that and open an i401(k).
That shouldn’t be too challenging. Thank you!
Hi, I am an independent contractor and work for 3 different organizations: 2 days per week for my largest contracting facility and 1 day a week for 2 additional separate organizations. I receive 1099 income from all of these.
I am starting a soloK in 2019 and I realize I can only save the employee (19k) portion once.
However, can I save more than the 56K cap? Can I save in multiple SoloKs/SEP IRAs?
Since I work at 3 separate organizations as an independent contractor, can I save in 3 separate 401K’S? Or 3 separate SEP IRA’s?
TIA
No. It’s all just one company- yours. One $56K limit.
Ok, thanks ! 👍
My understanding was that for each unrelated entity one can open a solo 401k. Since this is a grey area, you should obviously consult a tax pro if you decide to do this.
HI, I have gone through the 9 pages of the comments on this great blog from the original in 2014 and don’t think it has covered my hypothetical/hopefully real scenario:
I am a physician, but currently consulting, set up my own LLC (S-corp) and 401k which as I understand my spouse can also be a employee/covered under the plan.
My spouse has another job, a W-2 employee for another company (not related to my LLC) which he has a employee contribution only 401k
we both are over 50 so both have the catch up
I only have the LLC so will have :
LLC company employee contribution 401k: 19k +6k catch up
LLC company contribution: 37 k (not to exceed 100% of employee comp)
(total my 401k is 62)
If I employ my spouse in my LLC, and pay a reasonable salary, can the math for my spouse be:
W2 company employee contribution 401k: 10k +6k catch up
my LLC 401k employee contribution: 9k or so to make the employee total allowed of 25k
and then employer (LLC) company contribution: 37k (not to exceed 100% of employee comp)?
(both of us also have IRA 7k each including catch up)
is that correct?
No. If your spouse uses up his entire employee contribution at his regular job, you can only make employer contributions for him-20% of his earnings.
The IRA limits are totally separate.
I work as a 50yr/old, full-time, employed peds intensivist. My employer offers a 401k that allows after tax contributions and rollovers of after tax contributions. My plan for this year is:
19K pretax (employee) + 6K catch up
10K employer match
27 K after tax contribution and subsequent conversion/rollover to Roth IRA or Roth solo 401K
I also do consulting and expert witnessing for 1099 income. I have a solo 401K that was custom designed to invest “outside” of equities and bonds. My plan for this year is:
56K after tax contribution and subsequent conversion to Roth solo 401K
My hospital is asking me to take on some peds hospitalist hours. I asked to be hired as a contractor but they have resisted. They offered me an hourly w2 supplemental position and threw in a 403b/457 as a “carrot”. How does the 403b exception apply in this specific circumstance? How would a 457 play into this mix? The last thing I’d want is to be restricted in the amount I can contribute to my employed and solo 401k accounts.
That plan sounds fine if the 401(k) allows it as discussed here: https://www.whitecoatinvestor.com/new-mega-backdoor-roth-ira/
The hospital offers a 401(k) and a 403(b)? That’s odd and I’m not even sure legal. I think you’d better check all the facts (and they better too).
The 457(b), of course, is totally unrelated so would be an additional benefit.
Sorry if I was unclear.
The proposed job offers a 403b and 457. Not a 401k. The 403b/457 would be my 3rd/4th retirement accounts in addition to my employer 401k and solo 401k.
Main question was whether contributing to the 403b would impact my ability to maximize my contributions to employer 401k and solo 401k based on the 403b exception mentioned in your above text?
Secondary question was whether contributing to a 457 would impact those maximums?
Oh, it’s a THIRD job? I thought it was at the first job. At any rate, you don’t get another employee $19K +/- $6K contribution to the 403b. So only the 457 would be useful. Presumably there is no employer contribution to the 403b.
But yes, if somehow you decided not to use that employee contribution in the 401(k) at job 1 and used it at job 3, then it would lower the amount that could go into the solo 401(k) at job 2.
The 457 maximum is totally separate so you could do that.
So could it go like this?
Full-time employed 401K
56K after tax contribution to roth conversion
self-employed solo 401K
56K after tax contribution to roth conversion
Supplemental employed 457
25K pretax contribution
You’ve helped me immensely over the past few years. Do you accept donations on patreon?
I suppose you could do that, but why not use your $19K+$6K employee contribution as just a basic Roth 401(k) contribution into one of those plans?
Remember that the 457 catch-up contribution rules are slightly different, so read up on those:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-457b-contribution-limits
Thank you for all your spot on advice. I was hoping you may be able to shed light on my situation.
I work at a VA and a university. I currently contribute 19k to my TSP (Roth), with 4% match (non-Roth), 19k to 457b, and 6k backdoor Roth. I also have access to a 403b. Am I allowed to contribute another 19k to the 403b, or does my contribution limit for 401k/403b also include TSP?
“Am I allowed to contribute another 19k to the 403b”
No.
“does my contribution limit for 401k/403b also include TSP?”
Yes
I have a client who worked for 6 months at Hospital A. She put $19k into 403(b) and $19k into 457 and received $13k match = $51,000
She recently switched to Hospital B across town. 100% unrelated and non-affiliated.
If I am reading this correctly, she is no longer eligible for 403(b)? But she could contribute another $19k into her 457? Or is she eligible to start all over again since they companies are unrelated and non-affiliated?
Thanks!
She couldn’t put another $19K in the new 403b this year as her employee contribution is already used up at the first 403b. However, I believe she could do a whole other 457b. I think that $19K limit is per employer as well as it is the employer’s money. More employer money could go into the new 403b however, up to $56K. But good luck getting the employer to do that without putting anything in yourself. More likely, you won’t even be eligible for the new 403b for the first 6-18 months.
I am a K1 employee of a democratic group. We are all incorporated and I have a Solo 401K through my S-corp. I also do consulting work for the hospital system that my group is contracted with. They pay my Corp ~$23K. I also have a backdoor Roth.
Can I do another Solo 401K?
There is no such thing as a K-1 employee. If you get a K-1, you’re a partner and must use the partnership 401K. Better hope the IRS doesn’t clue in to the fact that you’re already breaking the law by using K-1 money to contribute to a solo 401(k). If you get 1099 income then you can use that to contribute to the solo 401(k).
I misspoke. We are a partnership and all partners are individually incorporated. There is no group 401K or defined benefit plan.
Again, if you are a partnership, and your employer is the partnership, not your individual entity. You can be individually incorporated, but you are still an affiliated group for retirement plan purposes, so you can not have individual 401k plans or anything of the sort, because it is the partnership that should be setting up a plan. You should be setting up a plan for the group with a single plan document. Do you know who told you that this is an allowed arrangement and what the reasons for doing this were? This is a big liability for the group, that’s for sure. These types of plans can possibly be all disallowed, so before making a change I would talk with an ERISA attorney and discuss what steps should be taken to fix it. This is similar to a ‘brokerage only’ type of plan that I discussed here:
https://www.whitecoatinvestor.com/how-to-best-group-retirement-plan/
So I would recommend setting up one plan under a single plan document. You can do a solo 401k for hospital work provided this is also not the hospital that pays the practice (you have to be very careful about affiliated service groups). You can also consider setting up a Cash Balance plan if the group wants to have more tax deferral, and it would be a lot more cost effective vs. trying to set up individual CB plans.
https://www.whitecoatinvestor.com/cash-balance-plans-for-solo-and-group-practices/
Bottom line is that someone gave you the wrong advice regarding setting up solo 401k plans. Individual entities are common in group practices, and you can still use them (not sure this has any advantages, and I see this used once in a while in smaller groups, though it definitely makes more work for your CPA), but then the plan would be adopted by the main entity and also by all of the individual entities.
Yup. Just incorporating doesn’t somehow change the fact that you’re a partnership. Sorry. Wish it was that easy as it would allow partnerships to easily exclude their employees from 401(k)s.
By the way, I just got off the phone with IRS (I had several unrelated questions to ask them), and I did ask them a question regarding your set up, and they agreed that is is a problem from their standpoint. This would definitely require some form of voluntary compliance to be filed with the IRS, especially if the solo 401k arrangement has been going on for a while, precisely for the reasons I mentioned above – you have an affiliated service group, so you must have a plan set up by the main entity, not by individual entities. But one thing they told me was that they are sympathetic in terms not going hard on plans like yours. They would be open to whatever resolution you propose (as long as it involves setting up one plan for the main entity), and I doubt you need to worry about fines/penalties, etc., so this would just be a way to mitigate any future issues in case this comes up during an audit.
I’m a solo proprietor who will gross approximately 60K from my business this year. I have a solo 401k that allows after tax contributions and in-plan Roth conversions. I’m planning on making a 56K after tax contribution to solo 401k followed by a Roth conversion.
My question is, do I actually have to have been paid the money to make the contribution. If it’s a “given” that the money I’ve already earned will be paid to me by years end, could I make the contribution preemptively? I am looking to make an investment that has favorable terms if funded by end of October.
I think technically it does need to be paid to you first, but I’ll bet that is pretty much never audited for a sole proprietorship. I’d be more careful with an S Corp if you were filing 941s each quarter.
So I’m finally getting off my butt and opening a self-employed 401k with fidelity so I can roll over some old SEP-IRA moonlighting funds and get back to doing a backdoor Roth IRA… which I haven’t done in a couple years d/t the SEP being around.
Now having a self-employed 401k, I was curious if I can contribute any more tax-deferred money into it, instead of dumping it into my brokerage account.
My set up– W-2 employee of a group, where my employee contribution of $19k goes into a 401k, and the employer contribution is a maxed out at $37k and oddly goes into a 403b.
My read is I’ve maxed out my employee contributions across all potential 401ks for the year, and because of the 403b I would have 56-37=19k of potential employer contribution to make into my self-employed 401k, assuming I made enough 1099 separate income to fund that? My understanding is the employer funding of a self-employed 401k is capped at 25% of earnings, so would need to earn nearly $76k to fully fund from this approach…?
25% not counting the contribution, 20% counting it but it’s the same amount of money. So if you used your employee contribution at the W-2 job, you would need just over $56K/20% = $280K in 1099 income to max it out.
You are correct that the 403b contributions reduce your solo 401k space and your elective deferral is already exhausted.
You would need about $96,290 self employment profit to allow $19,000 employer contribution into the solo 401k, assuming your W2 wages exceed the Social Security wage base of $132,900 in 2019.
If you setup a custom plan you could make an after tax $19,000 employee contribution to a solo 401k with only $19,258 of self employment profit. Then in plan Roth rollover or rollover to Roth IRA. So called mega backdoor Roth.
Makes a lot of sense for docs that have a moderate amount of self employment income where the allowed employer pretax contribution is relatively small.
The Finance Buff’s spreadsheet is very helpful in seeing these numbers. Input your numbers and adjust profit sharing between 0 and 25 to see the results.
https://docs.zoho.com/sheet/published.do?rid=hd3vb2c79aa2e630443d58a05e8140934898a
I don’t know that EMPLOYER 401(k) contributions reduce your solo 401(k) space do they?
Correct, but the questioner here says the employer contribution is going to a 403b.
All contribution dollars to a 403b, whether employee or employer, reduce the space available in a solo 401k under the annual addition limit.
That’s unfortunate. Such a weird twist. There really needs to be some reform of all these accounts.
Situations like this raise some interesting questions / scenarios.
For instance, the majority of people likely wouldn’t be aware of these aggregation rules. If one made contributions to the solo 401k which turned out to result in total 403b + solo 401k exceeding the annual addition limit, but not exceeding the limit within the solo 401k only, then which contributions are considered excess contributions?
If the 403b contributions are excess, but they’re employER contributions, then I don’t think they get returned/.removed, because they’re employER contributions. Could be a situation where someone innocently ignorant of these complex rules could be at an advantage.
This would be a good question for the forum to get some real expert advice on the “what if.”
Honestly, I really don’t think anyone is watching this. I mean, there is a rule and there is a right answer, but I don’t think the right hand is talking to the left hand in this instance and the likelihood of audit on it is pretty low.
Dr. D,
Do you know if you’ve ever heard any updates on this?
Like the OP in 2019, I have almost the same situation
1) W2 job
W2 401k employee match maxed out, W2 403b employer match
2) Moonlighting/1099
Solo401k
Is the limit contribution (employee and employer) 69k for the 401k + solo401k + 403b? Or 69k for 401, 69k for solo401k+403b? This is the only post that I’ve scoured for that even remotely has a similar situation to me
I think based on that odd rule for a 403b that all three of those accounts will share the same $69K (2024) limit. Too bad.
Hello! I’m running into the accountant issue stated above, but I’m also having a hard time following this article. Mind if I ask for some help?
Work as a W2 employee for an employer with a horrible 401K Match (1,500 once I contribute 4500) and I just opened a solo 401k for the Independent Contracting work I do, where I have been earning about 109k. Should it look like this:
W2 401k: Employee Contributes 4500, Employer Contributes 1500
1099 solo 401k: Employee Contributes 14,500, Employer Contributes _____(I’m not sure how to do this part)
—- for the employee and employer contributions, would this be done through payroll?
Looking into 2020, my employment is going to change drastically, and at most I can expect about 12k in Independent Contractor income. Should I even bother with the solo 401k?
Thank you for your help!
Do you have a payroll person for your business? If so, then yes, they can do it for you. But you don’t really say much about your business structure. Do you even have payroll in your business? A sole proprietorship, which is what most docs with $109K in 1099 income are, doesn’t really do payroll. You just get the leftover profits. At any rate, the calculation is 20% of net income (net of the employer half of payroll taxes like SS/medicare) can go in as an employer contribution. In your case, that’ll be something like $20K. So you’ll get $6K into your W-2 401(k) and $34.5Kish into your individual 401(k).
If you don’t want to bother with a 401(k), you can put $19K into your employee 401(k) and get your $1500 match. But that’s only $20.5K instead of $40.5K. I think a solo 401(k) is worth the ability to tax protected another $20K, yes. But with only $12K in IC income? Maybe not.
Hope that helps.
You’re right, I’ve left quite a bit out. I’m currently an S-Corp, so I’ll be doing payroll this year through a payroll provider. I’m getting the impression my accountant should have advised me to switch over to a sole-proprietorship, correct?
As for next year, I’ll probably stick with the employer 401k and not bother.
Thank you for all of your help!
I don’t know whether sole proprietorship or S Corp is right for you, but my general rule is if you can’t declare $100K+ as distribution, it probably isn’t worth it to anyone but the accountant.
Please help me get this right
W-2 income in medical director job (employed by TEAMHealth) 200k doing 18.5k in 401k and $200k in 1099 income working for the same company but as my own LLC contractor. Doing a SEP in this one but accountant says can only contribute 55-18.5k yearly to SEP.
The checks are paid to myself in w-2 vs myself, LLC in 1099 and although all come from TEAMHealth are technically signed by different companies (subsidiary).
Hmmmm…..tricky because the two companies paying you are clearly related. I don’t know for sure what the legal answer is, but doubt the IRS would notice if you put the whole $56K into the individual 401(k) in addition to the employer 401(k) since they’ll have different EINs attached to them. It would seem to me that the right answer is either # 1 you can’t open an individual 401(k) at all or # 2 you can max it out in addition to the employer 401(k) not the # 3 your accountant has proposed. I’m not sure your accountant understands the multiple 401(k) rules.
I could be worng but doesn’t it matter if the 18.5k in the Teamhealth 401k is an employee or employer contribution? If it is all employEE contribution, then the accountant might be right?
it matters only in that the employEE deferral limit ($19k actually in 2019) is exhausted in the W2 401k. This has no bearing on the SEP IRA or potential solo 401k annual addition limit ($56k in 2019) because the employers are unrelated.
“Unrelated employers” is confusing in this case, but remember in the case of 1099 income, the employer is the sole proprietorship, not Teamhealth.
I’m sorry, don’t think I asked my question properly. I think it might matter, depending on his tax situation. . . . .this stuff makes my head explode. Figuring this out makes me appreciate how convoluted our tax and retirement account related laws are and respect anyone who really understands this stuff. OK, I took a stab at it . . .
If his LLC is taxed as a single owner corporation, the OP can contribute 25% of the $200k (profit sharing/employER cont) plus $500 (remaining employEE contrib) to a solo 401k ($50500 total). If he chooses an SEP IRA, he can contribute $50k. The solo401k is a little better.
If it is taxed as a Sole Prop, he can only do 25% of adjusted earned income ($151,265) or, $37816 as employER contrib (profit sharing) plus the remaining $500 employEE contrib to a 401k. If the 401k contrib in his W2 job is profit sharing, he can make an employEE contrib $18384 ($56k total) If he chooses an SEP IRA, he only can contribute $37816. So, the Solo 401k might be a little or a lot better , depending on his situation.
So, I think it might matter significantly for the OP if his W2 401k is employER or employEE because it can effect his potential max 401k contrib . . . .of course, I’m an anesthesiologist and not an accountant and may have completely messed up the calcs . . .
the accountant is wrong.
The employEE deferral in the W2 401k has ZERO effect on the ANNUAL ADDITION LIMIT in the SEP IRA (or solo 401k)
as I said before (which is below because of the way these comments work):
You can contribute the lessor of $56k or 20% of net self employment earnings to the SEP.
You don’t think that’s gray at all? Seems a little gray when the 1099 is going to a company owned solely by an employee of the company. Not sure I’d want to defend that in an audit.
asked and answered in the forum several times before. I don’t think it’s gray at all, because there’s no ownership in the W2 entity
You make a strong argument, I’ve just never seen anything really definitive on it so it makes me nervous to recommend it, especially since my real name and reputation is on my posts so I try to be a bit less cavalier than I would if I were anonymous. 🙂
forum search fails to dig up what I’m looking for. This has been addressed by spiritrider
I’d encourage the poster here to post the question in the forum, perhaps spiritrider or someone else more qualified than me could verify
I believe this question was asked on the forum. We would definitely need more information than provided here. It appears that the same employer is paying both W2 and the LLC, so it looks like an affiliated service group to me. This issue has to be resolved first before we can discuss whether a retirement plan can be opened for the LLC.
Can you cite chapter and verse on that?
I emailed an ERISA attorney about this, he had an issue that someone is paid a W2 and a 1099 from the same source. At this point I have no idea, this is quite complex. We would need to have more facts before we can decide on whether this is an ASG or not.
That was my thought- that this is a pretty gray area.
You are perfectly fine to do a solo 401k (or SEP IRA though that’s inferior) for the 1099 income in addition to participating in the company 401k for your W2 income.
Because you have no ownership in the W2 job, the controlled group or affiliated service group rules don’t apply.
You have to open a solo 401k by 12/31 to use it for 2019. If you’ve already contributed to a SEP IRA for 2019 then you could do the solo 401k in 2020.
Your accountant is wrong. You can contribute the lessor of $56k or 20% of net self employment earnings to the SEP.
Thanks for all the comments.
Please enlighten the clueless–why is SEP inferior to solo 401k? (besides the backdoor roth ineligibility, which allows for maybe a 100$ in tax saving a year per my understanding?)
Alex – I’d encourage you to post your question in the forum
https://www.whitecoatinvestor.com/forum/
the format is more conducive to discussion there and the depth and breadth of answers will be better
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/