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Two For The Money: Can I Contribute To Two Retirement Plans If I Work Two Jobs?
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.
As long as the two businesses you work for have no legal overlap or affiliated relationship, then yes you can contribute to two retirement plans.
You can contribute $54,000 per job – up to a total of $108,000 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 you 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 $18,000 ($24,000 if she is age 50 or older by using the $6,000 “catch-up” contribution). Her employer kicks in another $36,000, meeting the $54,000 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 $54,000 to her account under that plan.
- Jane’s total contribution for the year can be up to $108,000 (or $114,000 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 $54,000 contribution ceiling. Employers can only contribute the lesser of 25% of compensation or $54,000, 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 $54,000 max. Those with a lower level of side income can navigate these limits by considering another option: the solo 401(k).
The solo (401) allows you to pay yourself twice, both as the employer and as the employee. The “employee” contribution you can make is limited to $18,000. The “employer” portion is again limited to 25% of compensation. Added together, the “employee” and “employer” parts must be $54,000 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 $18,000 in addition to the employer contribution of $25,000 (add it up and that’s right: total plan contributions = $43,000 and under the $54,000 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’ve made $10,000 of contributions to your company’s 401(k) you can only add an additional $8,000 “employee” contribution to the solo 401(k) set up for your side business.
Mark Your Calendar
The solo 401(k), while a nice option for small business owners, has to be established within the calendar year. So your account must be open by Dec. 31. You can open and fund a SEP IRA until the due date for your 1040, including extensions–meaning you can open one and make contributions until Oct. 15 of the next year. If you have two sources of income and are ready to capitalize on the fact that you can double your contributions, give us a call at 312-669-1650 and we can review the strategy that is best for you.