Most professionals only have one job. But it’s becoming increasingly common for Americans to have separate income streams. If you have two or more employers, this can mean having two separate retirement accounts.
It’s legal to have multiple 401k accounts. In fact, in a select few professions, it’s quite common. But there are limiting factors on when and how much you can contribute to them. You can even have a 401k with your W-2 employer and a Solo 401k allowing you to contribute based on your income as an independent contractor (Form 1099 income).
So, what are the rules surrounding retirement contributions if you already have a 401k profit-sharing plan but want another one.
Multiple 401k Profit-Sharing Accounts
The good news is that you can have more than one 401k profit-sharing plan.
Now that we’ve got the good news out of the way, we must go over the bad news. To be able to contribute to multiple 401k profit-sharing accounts, you need to follow several rules.
Rules For Those With Multiple 401k Accounts
The employee deferral limit set for 2020 and 2021 is $19,500 if you’re under 50 or $26,000 if you’re 50 or over. This limit applies equally to all 401k accounts regardless of how many employers you have. You can decide for yourself how to split your contributions between accounts, but the total amount you contribute can’t exceed the $19,500/$26,000 limitation.
The IRS requires that the employers contributing to your separate plans are unrelated. Keep in mind that you may qualify as one of your employers.
The contribution limit for unrelated employers is $37,500 each for 2020 (for a total combined employee deferral and employer contribution of $57,000). If you’re 50 or over, the limit is $63,500 (again, combined employee deferrals and employer contributions). These limits include employee and employer contributions, including employer matches.
Here’s an example: Assuming you are under 50 years old, if you fully contribute the employee deferral of $19,500 to W-2 employer “A”, you can’t contribute anymore as an employee to your Solo 401k based on your unrelated 1099 income. However, assuming you can max out the $57,000 based on each income stream, your employer can contribute $37,500 to your W-2 401k and you can contribute $37,500 to your Solo 401k. This is a combined retirement savings of $94,500 ($19,500+37,500+37,500)!
Wait, What Exactly Does “Unrelated Employers” Mean?
To be considered unrelated, your employers must not be part of the same entity or controlled group that owns 80% or more of another business. That means they can’t work for the same parent business as:
- An LLC
- A partnership
- A sole proprietor
In the case of smaller entities such as trusts or estates with 5 or fewer individuals, the rules are the same. For a lot of docs, this will mean their W-2 income and the additional moonlighting income from another hospital will count as unrelated employers.
If one of your income-producing activities is done through self-employment (aka Form 1099 income), you can use 20%, as a sole proprietor, of your net earnings (income less expenses) from self-employment or 25% as a W-2 earner through your S-corp/C-corp as employer contributions. Beyond that, your employee contribution limits ($19,500/$26,000) will remain the same.
One Account Per Employer
Regardless of the kind of employer or 401k account, you can only open one account per employer. Each employer can only offer you one 401k, SEP, SIMPLE, etc per year. However, keep in mind that these employer accounts have separate limits from:
- Health Savings Accounts (HSAs)
- Defined Benefit Plans (DBPs)
The above account types are completely unrelated to your 401k. So, if you have an IRA, you don’t need to factor contributions to them when calculating your 401k profit-sharing contributions.
It’s important to make sure you’re following the limits laid out by the IRS if you want multiple 401k profit-sharing accounts. For that reason, you may want to consider a specialized advisor that knows the ins and outs of retirement plan types and can handle your complex situation.
Overall, having multiple 401k accounts of any kind is not common in the US. It’s common among doctors and a select few other professions, but most Americans don’t consider the option. So, if your advisor lifts an eyelid when you ask, that might be why.
If you have multiple retirement accounts or have the opportunity to take advantage of having multiple accounts, contact Cerebral Tax Advisors to help you maximize your contributions. Use this link to schedule a Tax Discovery Session today!