You Can Have More Than One 401(k)


With the addition of the pass-thru deduction that could be worth more than $15,000 to self-employed physician and much more to those with different types of pass-through businesses, this Saturday Selection is timely.

The good Dr. Jim Dahle channels his inner CPA to describe in detail the rules allowing for multiple 401(k)s. This post actually gave me the idea to start an individual 401(k) for myself in 2016, and this is the third year in which I will contribute to two different 401(k)s.

This article originally appeared on The White Coat Investor and has been updated for 2018.


 

I first wrote about this subject over two years ago 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 $55K limit thanks to inflation, but all the same principles still apply.

I get tons of questions on this subject in online forums, in the comments sections of the posts on this site and by email. I’m mostly writing this post so I can 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 WCI in the first place.)

Here’s the deal. Many physicians work for multiple employers, or work as an employee and either an independent contractor or a consultant. Many others have a side job of another type. Their incomes are far higher than they require for their current spending needs, but they’re behind on their savings or otherwise have a desire to maximize the amount of money they can put into retirement accounts, especially tax-deferred retirement accounts.

Obviously, these types of accounts minimize tax, maximize returns, increase asset protection, and facilitate estate planning. Who wouldn’t want to get more money into them? However, most of these doctors are surprised to learn that you can have more than one 401(k). That’s right,

YOU CAN HAVE MORE THAN ONE 401(k)

 

[PoF: Stop shouting!]

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):

 

Chicago Bean Wide Angle

you can also have more than one reflection

 

Rule # 1: One Employee Contribution in Total

 

The IRS only allows you to make a total of $18,500 ($24,500 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 $18K ($24K if over 50) or less.

 

Rule # 2: $55K Per Unrelated Employer

 

The IRS also only allows you and your employer (which might also be you) to put a total of $55,000 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 (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. The first is a “parent-subsidiary” group. This is when a parent business (corporation, sole proprietor, LLC, partnership etc) owns 80%+ of another business. The second type is a “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 $53K limits. Pretty cool, huh? There are several common examples where this could apply to a physician:

 

Example One

A 40-year-old single physician is an employee of two completely unrelated hospitals. The first pays him $200K per year and matches 100% his first $5K put into the 401(k). It also offers him a 457.

The second pays him $100K per year and matches 50% of the first $7K he puts into his 401(k). What retirement accounts should this physician use in order to maximize his contributions?

  • Hospital 1 401(k): At least $5K (plus the $5K match)= $10K
  • Hospital 1 457(b): $18,500
  • Hospital 2 401(k): At least $7K (plus the $3,500 match) = $10,500
  • Plus another $6,500 into either hospital’s 401(k) (pick the one with the better investments)
  • Plus $5,500 into a backdoor Roth IRA
  • Total: $50,000

 

Example Two


A 40-year-old married physician whose spouse doesn’t work is a partner in a 100 doctor partnership which offers a 401(k)/Profit-sharing plan in which he can “self-match” up to the $53K limit. The partnership also offers a defined benefit/cash balance plan with a $30K limit.

He makes $300K practicing medicine. He is also the sole owner of a website on the side that makes $300K per year and has its own individual 401(k). Both 401(k)s offer a Roth option. What is the maximum amount he can put into Roth accounts in any given year without doing a conversion of tax-deferred dollars?

  • Partnership 401(k)/PSP: $55K, of which $18K can be Roth
  • Partnership DB/CBP: $30K, of which $0K can be Roth
  • Website Individual 401(k): $55K, of which $18,500 could be Roth if none of the Partnership 401(k) money represents an “employee contribution.” Otherwise, $0K Roth.
  • Personal Backdoor Roth IRA: $5,500
  • Spousal Backdoor Roth IRA: $5,500
  • HSA: $6,900
  • Total$157,900 of which $29,500 can be Roth

 

Example Three

 

This 52-year-old married physician (spouse doesn’t work) is an employee of a hospital where she is paid $200K. She has a 401(k) with a set $20K employer 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): $24,500 employee contribution + 20% * $100K = $20K employer contribution = $44K (technically slightly less due to Rule # 5 below)
  • Personal Backdoor Roth IRA: $6,500
  • Spousal Backdoor Roth IRA: $6,500
  • Total: $57,500

 

Example Four

 

A 40-year-old single physician is in a business partnership with one other physician and they have several employees. Due to hassles and the costs of their employees, they have opted to use a SIMPLE 401(k) for their practice. He makes $200K.

He also does some consulting work on his own as a sole proprietorship where he is paid on a 1099, about $50K per year. He and his physician business partner recently opened up another business where they sell a medical device. They are the only owners of both the practice and of the corporation that sells the device (which has no employees.) He makes another $50K from this company of which $25K is salary and $25K is a “distribution” from the S Corp. What kind of retirement set-up should this physician do?

  • Practice SIMPLE IRA: $12,500 employee contribution plus $6K (3% of salary) employer contribution: $18,500
  • 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.
  • Total: $18,500

 

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Rule # 3: Employer Contributions Are 20% of “Net Earnings From Self-Employment”

 

When calculating the employer contribution for a SEP-IRA or an Individual 401(k), you use your “net earnings from self-employment” This includes any amount used for an employee contribution, but excludes the amount used for S Corp distributions (those aren’t “earned income” and so can’t be used for retirement account contributions) and used for the employer half of the payroll taxes (same as the self-employment tax deduction).

The employer contribution in an individual 401(k) and a SEP-IRA is exactly the same, but since you can also make an employee contribution into an individual 401(k) (and 401(k) money isn’t included in the backdoor Roth pro-rata calculation,) a 401(k) is generally the better option for the self-employed, even if it is slightly more complicated to open (and must be opened in the calendar year rather than before tax day of the next year).

 

Rule # 4: You Only Get One SEP, SIMPLE, or 401(k) Per Unrelated Employer Per Year

 

Each unrelated employer should only have one of these three types of accounts for each tax year. However, you could open a SEP-IRA for your self-employment income in March 2015 for tax year 2014, and then open an individual 401(k) in June 2015 for tax year 2015 if you like. Remember that just because you are the sole owner of two separate businesses doesn’t mean you get two different retirement accounts. Those businesses are a controlled group.

 

Rule # 5: These Rules Have Nothing to do With 457s, IRAs, HSAs, or DBPs

 

457(b)s, Backdoor Roth IRAs, HSAs, and defined benefit/cash balance plans all have their own separate limits that have nothing to do with the limits for 401(k)s, 403(b)s, SEP-IRAs, and SIMPLE IRAs. Putting more into a Roth IRA doesn’t mean you can’t still max out your 401(k).

 

Rule # 6: Catch-up Contributions Also Allow You to Beat the $55K 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 $1000 catch-up, HSAs, have a $1,000 catch-up, and 401(k)/403(b)s have a $6,000 catch up.

That $6,000 catch-up is in addition to the $55K limit, so if you’re over 50, you’re self-employed with lots of income, and you make your full $24,000 employee contribution to your individual 401(k), the $55K limit becomes a $61K limit.

 

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 $53K (see Chapter 3.) So if you put $18K into your 403(b) at work, you are only allowed to put $53K-$18K=$35K into an individual 401(k).

 

Your Accountant Doesn’t Believe The White Coat Investor

 


Overall limit on contributions

 

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 $53K 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:

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:

  1. 100% of the participant’s compensation, or
  2. $55,000 ($61,000 including catch-up contributions) for 2018;  $54,000 ($60,000 including catch-up contributions) for 2017.

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 $53K 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.
Again note the key words- BY THE SAME EMPLOYER. So, different employer, totally separate $53K limit.

You're still not using Personal Capital? That's how I track the PoF portfolio.

 

What do you think? Are you using multiple retirement plans at unrelated employers? What is your set-up? Comment below!

25 comments

  • Good stuff.

    We currently utilize an employee 401(k) for one spouse and a SEP-IRA for the business owner of the family.

    Have been kicking around the idea of opening an individual 401(k) instead but it hasn’t happened yet.

    -DoD

    • The real benefits of an individual 401(k) over a SEP are that you can max it out with less income and you can still do a Backdoor Roth IRA. The only downside is a little more paperwork and it needs to be opened during the calendar year.

      • Exactly,

        Because we are still in debt repayment mode, we have tried to find a happy medium between paying down debt and investing. Right now, that results in contributing the max to one spouse’s 401(k) and backdoor Roth, and the other’s SEP-IRA. Instead of saving more into an Individual 401(k) and backdoor Roth for the SEP contributor we put that money to work on the student loans.

        Is that the right decision? Who knows, but it works for us right now. When the student loans are gone and there is more cash flow, opening the Individual 401(k) will really make sense.

        -DoD

  • I’ve always found this article interesting. Unfortunately, since I have a 403(b) at my main gig I am limited to the $36.5K for my solo 401(k). This really isn’t a problem for me now since in order to max that out I’d have to make $180K through my side gigs to even be able to max that out. I am not sure that will ever happen for me. I do wish I could have put the other 18K from my own contributions, but simply cannot do that with a 403B.

    An interesting twist to this is for someone, like my wife, who works for the government or has access to a governmental 457 in addition to their 403(B). After matching up to the employer match on the 401K that person could then elect to put the rest of their voluntary contributions into the governmental 457 so that they could then avoid the 403B issue and max out their employEE contributions to their solo401K.

    If you max out both your 401K and your governmental 457 at work, obviously this doesn’t help much….. but for my teacher wife that obviously isn’t an issues. Teachers don’t get paid much.

  • Thanks for this great reminder. I’m cutting back my retirement contributions at this point in my life, but for those starting out this is critical information. They are unlikely to hear about this from any of their friends or advisors.

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  • This is great – I have been looking for an explanation on ways to save more money. I lined up an engineering consulting gig on the side that will generate some nice side income. If I follow example two, it looks like my LLC will only be able to make a contribution to a solo 401(k) because I max out my work 401(k). Or can I save into my LLC’s 401(k)? Financial Panther wrote a post that mentioned if you max out a 401(k) at work, only 20% of your income from a side business can go into a solo 401(k)

  • John

    I have a couple of questions. I recently took a new position with a group in a different state. Prior to that I had my own solo practice run as an S corp and had a simple plan. So can I still max out my simple from my S corp as there is still money in the bank under the corportation and max out my 18500 from my current group practice 401 K. If I do, that will put me a $12,500 Simple + $375 Simple match (I would just pay myself $12500 as a salary and put it all into the Simple and then get a whopping 3% match on the $12500 saaraly) + $18500 401k + $18500 401k match = $49875. Now if I add $5500 backdoor Roth IRA will that be added to the $49875 total to get my max contribution or is the $5500 totally separate and unrelated.

    I Still max out my wife’s backdoor Roth $5500 and the HSA 6900

    So in total I could contribute: $67,775

    Is that correct or am I missing the boat somewhere? Thanks for the help

    • Did you have a “simple plan” or did you have a SIMPLE IRA? It’s important to be precise with your terminology to avoid confusion. I’m presuming you mean a SIMPLE IRA by the rest of your comment.

      The main downsides of a SIMPLE IRA are that the contribution limits are low and it prevents you from doing a Backdoor Roth IRA.

      401(k) limits are different from SIMPLE IRA limits, but you can only have one or the other for each unrelated employer. Sounds to me like you have two unrelated employers, so if you have enough income to justify the contributions to each you should be able to max out both.

      So yes, it sounds like you have it right except for a Backdoor Roth IRA for you. You could do the contribution step there, but you’ll get “pro-rata’d” if you do the conversion step with a SIMPLE IRA balance no 12/31.

  • Seniorsdoc

    So I have 2 LLCs on the side. One is for a group home , the other for my side gigs. So I can open 2 SEPs ? And if so what’s the max in each ?

  • Jaguy

    How is the information in this post affected if you are in a community property state? Both spouses work for the same group with a 401k (assume one spouse is an owner the other employed by the group there is ownership of the group but there are other owners as well and several employees) and both have side hustles. Can you give an example of how much can be contributed in a community property state if both spouses get 1099 and both contribute to group 401k. How can contributions to the group 401k, i401ks (each spouse has one), (we know how to do HSA, back door Roth) be maximized.

    • The main effect is that the employees of businesses owned by both spouses are all considered to work for the same business.

      In this case, unfortunately, if one spouse owns the majority of 2 businesses and the other owns 1, all 3 businesses are considered 1 business for 401(k) purposes and not only do you each only get one $55K limit, but you have to pass the anti-discrimination rules for the employees of the practice. So you may not even be allowed to have individual 401(k)s. You may want to seek some professional help to unwind that if this is the case.

      However, if the “owner spouse” owns a small percentage of the group (i.e. less than 50%) it’s different and you could both then have 401(k)s. So that would give you each $55K 401(k) + $55K i401(k) + $5,500 Backdoor Roth IRA + the combined HSA for a total of $237,900.

  • Wow! This is great info. I had no idea about the 403(b). I work at a non profit as a W2 and a 1099 for another org. I have a Solo 401(k). I need to talk to my tax guy about this. Thanks!

  • Just wanted to point out to people that if they are putting after tax money in a 401k it probably doesn’t make sense. You are tying up this money needlessly until retirement. Instead you can open up a brokerage account and have full access to it for your whole life.

  • lmbebo

    Thank you. Something I’ve been looking into myself. Partner in a small group (> 10 individuals). Have some 1099 income on the side as well. Looking at ways of maximizing my contributions.

    • That’s the typical scenario. You likely have some sort of 401(k)/Profit-sharing plan +/- a defined benefit/cash balance plan for the partnership. If not, hopefully you can talk the other partners into instituting it. Might be costly if you have lots of employees.

      Then an individual 401(k) for your EARNED self-employment income. Bear in mind not all 1099 income is earned income.

  • lmbebo

    Something I just thought about: What are y’alls thoughts that if you have this type of setup, i.e. ability to contribute to 2 different 401ks. Would you recommend doing a Roth 401k for personal contributions in 401k #1, get the full max from employer on matching and then doing a traditional 401k for your 1099 income?

  • Zac

    The wealth of information in this article is immense, and really helped put in perspective just how much I still have to learn even though I consider myself much more informed than many of my friends and peers. I’ll have to reread it a few times as I plan on earning some side income and being able to open a solo with it. I already have a self-directed Roth that I use, but ultimately right now I’m just looking of ways to earn more so I can save even more. Thanks for this!

  • Thank you for the timely information. I’m trying to figure out my total 2017 limit and most local tax agents are not much help. To be sure, I have a 403B and a 457 at my main job (W2 type). My employer has given me my limits for 2017: 403b is $24K and my 457 is $18K, I’m 62 and I funded the 403B at $23,900 and the 457 at $2.340. In 2017, I cut the 457 back since I’m going to have a RMD problems when I turn 70 1/2.

    In addition, I have an accounting business on the side which did $23K gross and about 13.5K net and I have a 401K for that business. My profit sharing amount that I can deduct is $2,550, so what is the amount that I can add for the additional employee or employer contribution. My wife and I also made the $6,500 contribution for our Roth’s contributions.

    Your help is much appreciated! You have helped many people with your blog and I continue to learn everyday from it!

    Thank you!

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