Author Topic: Employer 401k, Individual 401k, and tIRA - all at once?  (Read 4225 times)

ShoulderThingThatGoesUp

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Employer 401k, Individual 401k, and tIRA - all at once?
« on: July 02, 2015, 07:48:05 AM »
Along with my full-time job, my wife has a part-time job and does some freelancing. She contributes the vast majority of her employer income to her employer 401k. This year she's also earned some freelance money, and we plan to make the maximum contributions to both of our tIRAs this year, too.
Questions:
  • Can we shelter some of her freelancing money in an individual 401k?
  • Is the maximum pre-tax contribution to all 401ks still $18,000?
  • None of this should affect tIRA eligibility, right?

I called Schwab to verify that she'd be eligible for the account, and they said yes, but that what the limitations on contributions were might vary state-to-state. That sounds bizarre since this is federal tax we're talking about. Pennsylvania, where we live and all income is earned, has an unambiguous flat tax rate of 3.07% (might be going up soon), and school districts and municipalities each take another 0.5%.

GreenHorn101

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #1 on: July 02, 2015, 08:32:36 AM »
Can we shelter some of her freelancing money in an individual 401k?
Is the maximum pre-tax contribution to all 401ks still $18,000?


Yes, you can contribute to multiple 401k plan. However, you are still subject to $18,000 threshold across all plans. The limit is by person, not by plan. As of Tax Year 2015, contribution limit for 401k is $18,000 and IRA is 5,500. 

http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

None of this should affect tIRA eligibility, right?

I am not 100% sure but I think tIRA deduction is limited by your income if you already have a retirement plan at work.

http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Cheddar Stacker

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #2 on: July 02, 2015, 08:52:45 AM »
SEP IRA, or SIMPLE IRA should do the trick.

The total 401k employee contribution limit is the $18K. Total contributions to deferred compensation plans is $53K. These IRA's are not 401k's, so you can contribute to them in addition to the $18K 401k limit.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

johnny847

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #3 on: July 02, 2015, 08:57:12 AM »
SEP IRA, or SIMPLE IRA should do the trick.

The total 401k employee contribution limit is the $18K. Total contributions to deferred compensation plans is $53K. These IRA's are not 401k's, so you can contribute to them in addition to the $18K 401k limit.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

Expanding on that:
Let's assume your wife maxes her regular job's 401k, and she gets a match of $2000. That means she's contributed the max as an employee, and she's used $20k of the $53k limit. But, your wife can still contribute to a solo 401k as an employer - 25% of her profits, up to $33k.

If I recall correctly the solo 401k gives you the highest contribution limits as an employer. If she's maxing her employee contribution at work, this should be the best option.

dandarc

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #4 on: July 02, 2015, 09:01:03 AM »
SEP IRA, or SIMPLE IRA should do the trick.

The total 401k employee contribution limit is the $18K. Total contributions to deferred compensation plans is $53K. These IRA's are not 401k's, so you can contribute to them in addition to the $18K 401k limit.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions
Agree SEP is probably the way to go for OP.

Just want to clarify on the bold part - you get 53K per employer.  So if you had an extremely generous employer and a high salary, and also a successful self-employed side gig, you've got two 53K buckets to fill.

johnny847

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #5 on: July 02, 2015, 09:02:41 AM »
SEP IRA, or SIMPLE IRA should do the trick.

The total 401k employee contribution limit is the $18K. Total contributions to deferred compensation plans is $53K. These IRA's are not 401k's, so you can contribute to them in addition to the $18K 401k limit.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions
Agree SEP is probably the way to go for OP.

Just want to clarify on the bold part - you get 53K per employer.  So if you had an extremely generous employer and a high salary, and also a successful self-employed side gig, you've got two 53K buckets to fill.

No you don't. Your employee $18k limit is across all 401k plans.
Not 100% sure on the $35k limit - if that is two $35k buckets or if that limit is combined across plans - but if I had to guess the answer is no - you only get one $35k bucket.

ShoulderThingThatGoesUp

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #6 on: July 02, 2015, 09:04:40 AM »
So, the most likely scenario is she's put about $10k into her employer one. 25% of profits from freelancing would be less than the remaining $8000, so instead she should put $8000 into an individual 401k - right?

dandarc

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #7 on: July 02, 2015, 09:08:45 AM »
Having that number changes the equation.

Now back on the I-401K bandwagon.

If she puts 10K in at her employer, she can then put 8K + 25% into the soloK.  How is her freelancing organized?  I ask because, if she is incorporated, the match is 25% of her W-2 wages.  If not, it is 20% of her net less 1/2 self employment taxes.

Then she might be low-enough on the profits side that she runs into other limits like "you can't put in more than you earned".

dandarc

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #8 on: July 02, 2015, 09:14:36 AM »
SEP IRA, or SIMPLE IRA should do the trick.

The total 401k employee contribution limit is the $18K. Total contributions to deferred compensation plans is $53K. These IRA's are not 401k's, so you can contribute to them in addition to the $18K 401k limit.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions
Agree SEP is probably the way to go for OP.

Just want to clarify on the bold part - you get 53K per employer.  So if you had an extremely generous employer and a high salary, and also a successful self-employed side gig, you've got two 53K buckets to fill.

No you don't. Your employee $18k limit is across all 401k plans.
Not 100% sure on the $35k limit - if that is two $35k buckets or if that limit is combined across plans - but if I had to guess the answer is no - you only get one $35k bucket.
Right you get 1 18K employee deferral across all plans.

You get up to 53K at each unrelated employer.  So if you're say a doctor working as an employee at a hospital, and also moonlighting and making lots of money on the side, you could conceivably do 2 full 53K buckets.  Say your salary is 212K at the hospital, and they match 25% of your salary regardless of contribution - $53K.  Then you make another $150K on the side.  We'll assume you are incorporated, and that is your W-2 wage.  You haven't used your 18K employee deferral, and 25% of 150K puts you over 53K, so that's another $53K you could defer.

http://whitecoatinvestor.com/multiple-401k-rules/




ShoulderThingThatGoesUp

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #9 on: July 02, 2015, 09:19:19 AM »
Not incorporated. This was likely a one-time thing (she helped a family member) so incorporation would not be worth it. So the plan is:

$10k into employer 401k
$8k into individual 401k
(Earnings - [self employment tax])*0.2 into SEP IRA?

johnny847

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #10 on: July 02, 2015, 09:22:39 AM »
SEP IRA, or SIMPLE IRA should do the trick.

The total 401k employee contribution limit is the $18K. Total contributions to deferred compensation plans is $53K. These IRA's are not 401k's, so you can contribute to them in addition to the $18K 401k limit.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions
Agree SEP is probably the way to go for OP.

Just want to clarify on the bold part - you get 53K per employer.  So if you had an extremely generous employer and a high salary, and also a successful self-employed side gig, you've got two 53K buckets to fill.

No you don't. Your employee $18k limit is across all 401k plans.
Not 100% sure on the $35k limit - if that is two $35k buckets or if that limit is combined across plans - but if I had to guess the answer is no - you only get one $35k bucket.
Right you get 1 18K employee deferral across all plans.

You get up to 53K at each unrelated employer.  So if you're say a doctor working as an employee at a hospital, and also moonlighting and making lots of money on the side, you could conceivably do 2 full 53K buckets.  Say your salary is 212K at the hospital, and they match 25% of your salary regardless of contribution - $53K.  Then you make another $150K on the side.  We'll assume you are incorporated, and that is your W-2 wage.  You haven't used your 18K employee deferral, and 25% of 150K puts you over 53K, so that's another $53K you could defer.

http://whitecoatinvestor.com/multiple-401k-rules/

I stand corrected. I was assuming that you'd try to partially fill the $53k bucket with the employee contribution in both places, but you certainly don't have to if you don't want to.

dandarc

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #11 on: July 02, 2015, 09:24:26 AM »
Not incorporated. This was likely a one-time thing (she helped a family member) so incorporation would not be worth it. So the plan is:

$10k into employer 401k
$8k into individual 401k
(Earnings - [self employment tax])*0.2 into SEP IRA individual 401K?
No need for a SEP if you also have an i401K.

You might want to fill out the worksheet on page 23 here: http://www.irs.gov/pub/irs-pdf/p560.pdf to give you an idea of the individual 401K contribution with your specific numbers.

TomTX

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #12 on: July 03, 2015, 08:25:23 PM »
Not incorporated. This was likely a one-time thing (she helped a family member) so incorporation would not be worth it. So the plan is:

$10k into employer 401k
$8k into individual 401k
(Earnings - [self employment tax])*0.2 into SEP IRA?

Is an individual 401(k) easier/cheaper than a SIMPLE IRA?

seattlecyclone

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #13 on: July 04, 2015, 10:54:43 AM »
As long as you are able to max out the $18k pre-tax limit elsewhere, the SEP and the individual 401(k) seem pretty equivalent: you can contribute 25% of your self-employment earnings to either. If you plan to make the side business your only business at some point, the 401(k) would be a better choice at that time because you can shelter 100% of your first $18k and then 25% after that up to $53k total.

ShoulderThingThatGoesUp

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #14 on: October 01, 2015, 07:55:41 AM »
It appears we need an EIN for the individual 401k. Does this make sense? Is there any reason not to get one?

dandarc

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Re: Employer 401k, Individual 401k, and tIRA - all at once?
« Reply #15 on: October 01, 2015, 12:41:37 PM »
It appears we need an EIN for the individual 401k. Does this make sense? Is there any reason not to get one?
I was able to open an account at E-Trade without an EIN years ago.  However, I now think they let me do that incorrectly, so I got one later on.  Form 5500-EZ, which you'll have to file when you've got more than $250K in the plan requires an EIN.

Very easy to get one.  Not sure there is a downside.

Quote from: TomTX
Is an individual 401(k) easier/cheaper than a SIMPLE IRA?
No - generally speaking, the SIMPLE is slightly easier and cheaper.  The downside of the SIMPLE is that the contribution limits are lower.  With the I-401K, you've got 18K +25%.  With SIMPLE, you've only got 12.5K + 3% to work with.  The decision is really between a SEP and an i401K if you've got no employees and are trying to defer as much as possible, although if you're not wanting to defer all that much, a SIMPLE is another way to go.