Author Topic: How to Optimize both a Solo 401k/SEP IRA + Employer Sponsored Plan  (Read 3702 times)

Field123

  • Stubble
  • **
  • Posts: 102
I've done some googling of this issue but haven't quite found the answer....

Here's the question:

Suppose someone works full time and is covered by a retirement plan at work (401k, SIMPLE IRA, etc). That person also has a side business in which they are self employed. What are the relevant rules and what is the most optimal way for this person to maximize their pre-tax retirement savings?

Here's my situation for context, any input for my exact situation would be most appreciated:

I have a SIMPLE IRA through my full time employment where I contribute the max $12,500 + 3% employer match. I also work on the side as a real estate broker. In November, I will have my "managing brokers" license and be fully self employed as a realtor (still a side gig). I expect to earn between $25,000-50,000 per year through this side hustle. I'd like to invest all of this money, if possible. What can I do to MAX OUT pre-tax contributions??

From my research it seems that you can contribute to as many retirement accounts as you want, but can't exceed the maximum employee contribution amount. I'm not sure how this works when both a SIMPLE IRA and 401k are involved. But my thinking is there must be a strategy to use the solo 401k employer contribution to max out.

Thoughts? Thanks in advance!

Mother Fussbudget

  • Pencil Stache
  • ****
  • Posts: 840
  • Age: 58
  • Location: Indianapolis, IN
Re: How to Optimize both a Solo 401k/SEP IRA + Employer Sponsored Plan
« Reply #1 on: June 04, 2015, 07:11:32 PM »
You can set up a 401k plan just about anywhere - check with your brokerage (I.e. vanguard, Fidelity, etc). Call and they'll tell you more no doubt.

You can not only contribute to the limit in a pre-tax 401k, but ask if who ever you chose for your independent 401k supports AFTER-TAX contributions to 401k accounts. Your primary job 401k might allow after tax contributions (Google for current limits...  $50k?), but ask your benefits person to be sure. Searching "after tax 401k" should bring up lots of info. Best of luck!

RequiemforEnnui

  • 5 O'Clock Shadow
  • *
  • Posts: 12
    • Vacation sooner, for less!
Re: How to Optimize both a Solo 401k/SEP IRA + Employer Sponsored Plan
« Reply #2 on: June 05, 2015, 11:36:39 AM »
One other thing to note is that if you have a Solo 401k, you can make "employer" contributions equal to 25% of your "employee" pay tax-free. So if, for example, you were looking at 50k in total profit you'd be receiving from your side hustle as income, you could theoretically contribute $10k as an "employer" contribution and take the other $40k as income, contributing from that to the normal $18.5k per year limit for deductible contributions.  That $18.5k would include contributions to your regular employer 401k as well as your Solo 401k.

As far as post-tax contributions, you'd need to check with your Solo 401k administrator, but as long as you're willing to do the administrative / accounting work that shouldn't be hard to set up.

Field123

  • Stubble
  • **
  • Posts: 102
Re: How to Optimize both a Solo 401k/SEP IRA + Employer Sponsored Plan
« Reply #3 on: June 05, 2015, 02:23:40 PM »
Thanks for the responses. Does anyone know how it works when both a SIMPLE IRA and a solo 401k are used? I imagine the maximum total (pre-tax) contribution is capped at the 401k amount of $18,000?

So it seems that the most optimal strategy would be to reduce the SIMPLE IRA contribution to 3% of salary so as to get the match, then put the remainder left under the $18000 cap in from the side business as employee contribution and have the side business employer contribution max out at 25%. Does this make sense or am I missing something?

dandarc

  • Magnum Stache
  • ******
  • Posts: 3973
  • Age: 37
Re: How to Optimize both a Solo 401k/SEP IRA + Employer Sponsored Plan
« Reply #4 on: June 05, 2015, 02:37:02 PM »
http://finance.zacks.com/can-contribute-401k-simple-ira-same-year-2907.html

And yes, that's what I'd do, unless the SIMPLE had funds you really liked, and you couldn't get in any solo 401K.

One caveat on Solo 401K - the 25% limit only applies if you are incorporated, and then to your W-2 wages.  If you are a sole proprietor, the number is 20% of your net less 1/2 self employment taxes.  I use 18.5% as I go along during the year, then plug everything in to turbo tax and true it up at tax time (the difference for me is only $100 or $200 from what I actually put in, but that's $25-$50 in tax savings). 

Then if your side-business income is on the lower end, you can run into the "employee + employer" can't be more than total income as well.

As a hyopthetical, if your day job plan was a 401K and not a SIMPLE, it might be better to max the 401K at work and do a SEP-IRA for the side-business to reduce paperwork, but since in reality you can only defer 12,500 in the SIMPLE, makes sense to do Solo-K for the side-business.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3973
  • Age: 37
Re: How to Optimize both a Solo 401k/SEP IRA + Employer Sponsored Plan
« Reply #5 on: June 05, 2015, 02:41:23 PM »
I've found this calculator to be handy for looking at these things:

http://solo401k.bcmadvisors.com/calculator.html

remember to reduce the maximum SoloK & SIMPLE contribution by 12,500, since you can defer that much into your day-job SIMPLE regardless.

Field123

  • Stubble
  • **
  • Posts: 102
Re: How to Optimize both a Solo 401k/SEP IRA + Employer Sponsored Plan
« Reply #6 on: June 05, 2015, 03:08:25 PM »
http://finance.zacks.com/can-contribute-401k-simple-ira-same-year-2907.html

And yes, that's what I'd do, unless the SIMPLE had funds you really liked, and you couldn't get in any solo 401K.

One caveat on Solo 401K - the 25% limit only applies if you are incorporated, and then to your W-2 wages.  If you are a sole proprietor, the number is 20% of your net less 1/2 self employment taxes.  I use 18.5% as I go along during the year, then plug everything in to turbo tax and true it up at tax time (the difference for me is only $100 or $200 from what I actually put in, but that's $25-$50 in tax savings). 

Then if your side-business income is on the lower end, you can run into the "employee + employer" can't be more than total income as well.

As a hyopthetical, if your day job plan was a 401K and not a SIMPLE, it might be better to max the 401K at work and do a SEP-IRA for the side-business to reduce paperwork, but since in reality you can only defer 12,500 in the SIMPLE, makes sense to do Solo-K for the side-business.

Thanks, Dan! Really helpful. Any idea if the employer match on the SIMPLE counts toward the contribution limit? I wouldn't think it would...

dandarc

  • Magnum Stache
  • ******
  • Posts: 3973
  • Age: 37
Re: How to Optimize both a Solo 401k/SEP IRA + Employer Sponsored Plan
« Reply #7 on: June 05, 2015, 03:19:32 PM »
http://finance.zacks.com/can-contribute-401k-simple-ira-same-year-2907.html

And yes, that's what I'd do, unless the SIMPLE had funds you really liked, and you couldn't get in any solo 401K.

One caveat on Solo 401K - the 25% limit only applies if you are incorporated, and then to your W-2 wages.  If you are a sole proprietor, the number is 20% of your net less 1/2 self employment taxes.  I use 18.5% as I go along during the year, then plug everything in to turbo tax and true it up at tax time (the difference for me is only $100 or $200 from what I actually put in, but that's $25-$50 in tax savings). 

Then if your side-business income is on the lower end, you can run into the "employee + employer" can't be more than total income as well.

As a hyopthetical, if your day job plan was a 401K and not a SIMPLE, it might be better to max the 401K at work and do a SEP-IRA for the side-business to reduce paperwork, but since in reality you can only defer 12,500 in the SIMPLE, makes sense to do Solo-K for the side-business.

Thanks, Dan! Really helpful. Any idea if the employer match on the SIMPLE counts toward the contribution limit? I wouldn't think it would...

The employer side of the SIMPLE should have no bearing whatsoever on the SoloK - only the employee deferral part. 

White Coat Investor has some good articles on all this.  As you can imagine a lot of doctor's have high incomes and many have more than one job, so multiple retirement accounts is a very relevant topic over there.