At times, retirement planning can seem to be more of a headache than anything. What is allowed? What’s not? Let’s say you’re working a full-time job to pay the bills, while trying to put together your own small business on the side. Your employer offers a 401k plan and you want to take him up on that, but what about the money made from your own company? Do you have to put it all in the same account? The answer is no.
Can you contribute to your company’s Solo 401k plann and the corporate 401k plan offered by your employer at the same time? The answer is yes!
Knowing the Rules
We know, the rules can get confusing, but on this point, the Internal Revenue Service is crystal clear. Yes, you can contribute to multiple retirement plans.
You can keep the one set up by your employer and still open a private Solo 401k plan for your small business. The IRS is also clear that having one type of account doesn’t disqualify you from any of the rest. For example, you can have both a traditional and a Roth IRA plan. You can have a Roth and a Solo 401k plan. Just mix and match to fit your needs.
Why is this allowed? It’s because the IRS looks at each account separately, with some exceptions, as we’ll explain in a minute. You simply have to qualify for each one. Some qualifications are income based and some, such as the Solo 401k, require you to run your own business.
Now before we go any further, if you’re confused about who qualifies for a Solo 401k plan, we can answer that here. And if you have questions about the Roth IRA or Checkbook IRA plans, here’s some answers for from the IRS.
How Much Can You Contribute?
Once you have your accounts set up, there are a few more questions that need to be answered. What are the limits to how much you can contribute for each account? How often can you contribute, if you have more than one?
First, let’s answer the simple question. You can contribute to multiple retirement plans in the same tax year without penalty. If you are working a full-time job and building your own company on the side, that means you can contribute to both your employer-based 401k and also set money aside this year in a Solo 401k. In fact, the IRS even has an example of how much you can contribute to multiple retirement plans on their website.
Now that we know contributions to multiple retirement plans in the same tax year are allowed, let’s look at the deferral limits. The IRS provides a detailed breakdown of the formula here. For 2019, the IRS has set the basic limit on paycheck deferrals at either $19,000 for the year or 100 percent of the employee’s check, whichever is less. That’s $19,000 total, no matter how many jobs or employer-based retirement plans you have.
If you try to defer more than that limit, a red flag goes up and you get penalized. To get a handle on your numbers, check out our contribution calculator. And always work with your CPA to ensure your contributions are calculated correctly. When you contribute to multiple retirement plans, it’s important not to over contribute and create a potential tax liability.
Keeping Good Records
As we mentioned, the $19,000 is a firm limit for employer-based deferrals and if you’re contributing to multiple accounts, you have to keep track of any changes. For example, let’s say you’re 38 and have a full-time job. You set aside $2,500 in pre-tax contributions to your employer’s designated plan this year. If you are also contributing to a Solo 401k plan, your maximum employee salary deferral contribution would be $16,500. That comes from taking the $19,000 limit and subtracting the $2,500 you’ve already contributed.
Fortunately, the Solo 401k also allows employer profit-sharing contributions. With the Solo 401k plan, you can contribute up to $56,000 per year! That number increases to $62,000 per year if you are age 50 or older. Therefore, contributing to multiple retirement plans can really help to boost your retirement nest egg.
If you have any questions about Solo 401k plans, such as how to invest, what options are available or anything else we haven’t covered, you can get more information here. And if you ever want to run numbers on contributing to multiple retirement plans, our team is happy to walk you through some calculations.