It’s a simple question. Can you contribute to two retirement plans if you work two jobs? And let’s face it. It’s a good question to ask. Perhaps you make a nice salary at a corporate day job and are running a small side business that is starting to generate profits. Take the time to understand the rules when planning your retirement savings: as long as the two businesses you work for have no legal overlap or affiliated relationship, indeed you can contribute to two retirement plans.
You can contribute $72,000 per job – up to a total of $144,000 contributions each year – to your defined contribution plans, including 401(k) plans, SEP IRAs, profit-sharing plans, and 403(b) plans. So, you can, quite literally, double the amount of your contribution. And don’t forget retirement contributions can help shelter your income, so money you put away from your successful consulting business can also help reduce your tax bill.
Here’s an example of how you might double-up your savings:
- Jane works for XYZ Corporation and makes her maximum salary deferral contributions to her 401(k) of $24,500 ($32,500 if she is age 50 or older by using the $8,000 “catch-up” contribution). Her employer kicks in another $47,500, meeting the $72,000 limit in total.
- She also makes $300,000 running a consulting business as a sole proprietor. There is no common ownership between this business and XYZ Corp.
- If Jane establishes a 401(k), SEP IRA, or profit-sharing plan for the consulting business, she can contribute up to $72,000 to her account under that plan.
- Jane’s total contribution for the year can be up to $144,000 (or $152,000 if over age 50 – the “catch-up” provision can only be used once).
For those with less side-income, a solo 401(k) may be twice as nice
Typically, a SEP IRA is the best option for someone who already maxed out a 401(k) at work or who earns enough self-employment income reach the $72,000 contribution ceiling. Employers can only contribute the lesser of 25% of compensation or $72,000, so if you earn $100,000 from your side-job, the most you (as your own employer) can contribute to a SEP IRA is $25,000. And if you do earn $300,000, you are still limited to the $72,000 max. Those with a lower level of side income can navigate these limits by considering another option: the solo 401(k).
The solo (401k) allows you to pay yourself twice, both as the employer and as the employee. The “employee” contribution you can make is limited to $24,500. The “employer” portion is again limited to 25% of compensation. Added together, the “employee” and “employer” parts must be $72,000 or below. So, for our investor friend making $100,000 on the side, they can only contribute $25,000 to a SEP IRA. However, if they instead open a solo 401(k), they can make an “employee” contribution of $24,500 in addition to the employer contribution of $25,000 (add it up and that’s right: total plan contributions = $49,500 and under the $72,000 total max). It’s important to note that “employee” contributions are aggregated across all your retirement income plans; you can’t double-up here. So, if you have maxed $24,500 of contributions to your company’s 401(k), you cannot add any additional “employee” contribution to the solo 401(k) set up for your side business. Your total solo 401k limit will be 25% of compensation or $72,000, whichever is lower.
Mark Your Calendar
Under SECURE Act 2.0, sole proprietors have until their tax filing deadline (April 15, or October 15 with an extension) to establish and fund a Solo 401(k) for both employee and employer contributions. For S-Corps and Partnerships, the plan must typically be adopted by December 31 to allow for employee salary deferrals, though employer profit-sharing contributions can still be set up as late as the business tax filing deadline. 312-669-1654.
No client or potential client should assume that any information presented or made available on or through this website should be construed as personalized financial planning or investment advice. Personalized financial planning and investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. The information provided in this article is based on current tax and retirement laws and regulations, which are subject to change. Future changes in applicable laws or regulations may impact the accuracy or relevance of the information contained herein. Please contact the firm for further information.
