Multiple 401k

[vibez420]

Long time lurker, first time poster...

I finally, through a very roundabout way, found your post on multiple 401ks if you have separate employers. I was curious if this applied in my case.

 

So i have 4 jobs:

1. Employed full time surgeon, hospital employed: $600k. Has a 403b and a 457b with 50% matching on the 403b. So i drop 18k into 403b, employer puts in 9k, i max the 457b. Total 45k.

2. Contract locum surgeon at separate hospital, different state: ~$250k. Has a 401k and a 457b. The 401k has 50% matching as well. i don't contribute to either. However, this hospital will also contribute up to 6% of $260k max or so on top. So every year I get around $15.6 - 15.9k.

3. Peer review for a separate company: 1099 employee. ~$150 - 200k. I have not set up a LLC or S-corp yet. The CPA told me S-corp isn't worth it as i max out my social security/medicare payments every year from my other jobs anyways. Not sure if there's a vehicle to save for retirement here.

4. IME: About to start this job ... not sure the total pay / year, but maybe anywhere from $100 - 300k depending on how much time i commit. Again, not sure if there's a vehicle to save for retirement.

 

Maybe i should talk to a fiduciary or CPA, but you guys seem so knowledgeable and understand my situation, i figure i would try here. I'm trying to limit my taxes ... maximize my retirement accounts. Can i set up an individual 401k for each of my job #3 and job #4? Do i have to set up a separate single entity LLC or S-corp for each of my job #3 and #4 to do that, and have myself (employer self) pay me $53k?

Also, i'm just starting up (3 years out from residency), so i haven't done or figured out how to do the mega backdoor stuff yet... just paid off all the debt instead (student and otherwise). Talking to the fidelity guy this week. I was hoping you guys could provide me a roadmap of the maximum amount i could save.

Sorry for the long post, thanks for your time!

 

Addendum: I do max out a HSA account for $6500 as well for myself. My spouse just got hired, so I will max out her 403b, 457, HSA, as well when she starts up.

[spiritrider]

Ok, you have a lot of moving parts, so this is going to get a little complicated. Hopefully, I will get this all correct and explain clearly.

First, the rules and regulations. For 2017 there is one $18K employee deferral limit per employee across all qualified Defined Contribution (DC) plans (SIMPLE IRA, 401k, 403b). For 2017 there is one $54K annual addition limit (employee contributions + employer contributions) per unrelated employer. A 403b is considered controlled by the participant and must be aggregated with any retirement plans of businesses owned by the participant. 457b plans are non-qualified plans and have a separate $18K limit across all 457b plans.

Your current jobs situation:

1. 403b: $18K employee deferral, $9K employer match. 457b: $18K employee deferral.


2. 401k: no employee deferral space left, no match, 6% non-elective employer contribution up to compensation limit (2017 = $270K). 457b: No 457b contribution space left.


3. 
   
   
   
   1. There is likely no practical benefit to setting up LLC with no employees. The professional services of the owner receive little to no liability protection. Sole proprietor with adequate malpractice and business liability insurance is fine. As noted by the knowledgeable CPA an S-Corp would likely be actually counter-productive and cost you extra FICA.
   
   
   2. You should set up a one-participant 401k. You will not be able to make an employee deferral, because you have already used the limit with job #1. You will be able to make an employer contribution up to 20% of net self-employment income (net business profit - 1/2 SE tax). However, with the 403b contributions, that annual limit will be $54K - 403b $18K employee deferral - 403b $9K employer match = $27K.
   
   
   
   


4. Depending on this jobs retirement plans offered there may or may not be additional space available. If this job is also a 1099 it will not necessary increase your available retirement space. This will be a related employer and you will still be subject to a single $54K annual addition space. If both jobs #3 and #4 are similar occupations, there is no need for separate entities. Here again if this is just providing professional services with no employees, there is no likely benefit to an LLC. I forget the exact number (maybe Johanna knows), but when you have >= SS max earnings in job #1, you need ~400K+ in moonlighting income to justify an S-Corp.

There is no need or benefit to setting up separate one-participant 401k plans for 1099 jobs #3 and #4. It will not get you any additional retirement plan contribution space. The simplest approach would be to have a single sole proprietorship and a single one-participant 401k plan for both 1099 jobs. Even if it is required/useful to have separate business entities for 1099 jobs #3 and #4, Fidelity allows you to specify more than one employer on their Self-Employed 401k Adoption Agreement.

NOTE: The single best optimization to gain you additional retirement contribution space would be to switch your employee deferral and 50% match to employer #2's 401k. This will then not be part of your annual addition limit for one-participant 401k plan(s), gaining you an additional $27K contribution space. This will allow the following contributions.

1. 403b: No contributions. 457b: $18K employee deferral to best 457b plan.


2. 401k: $18K employee deferral, $9K employer match, 6% non-elective employer contribution up to compensation limit (2017 = $270K). 457b: $18K employee deferral to best 457b plan.

3. and 4. If both 1099 compensation, share one participant 401k $54K employer contribution space

5. You and your spouse $11K total backdoor Roth contributions. If any pre-tax IRA balances, rollover to best 401k/403b plan.

And you thought your post was long. I realize it is a lot to take in, any questions?

[ajm184]

Congrats and paying off your debts in 3 years after residency.  Though I cannot answer your specific question, I would seriously consider working with a financial planner (a fee only financial planner) prior to seeing this person from Fidelity.  Nothing against Fidelity, but you imo are better served having a roadmap in place and get their assistance in implementation.  Otherwise you go in without a plan and having to rely upon the advice provided that you a. may not fully understand/agree with, or b. You may inadvertently omit critical information to Fidelity.

Better you spend the time and money upfront getting an overall plan in place and potentially let excess cash sit in a checking/savings account than make decision in haste that can cost you far more down the road.

[vibez420]

I think i'm picking up what you're putting down. So for simplicity sake, lets say it's Jan 1, 2018 and it's a clean slate in terms of contributions.

Step 1: Form a sole proprietorship. Googling this, seems simple. Just pick a name, make sure it's not like anyone else's name, register with the state. As i already have all my licenses, i won't need any additional ones. And since i have no employees i won't need to file for a EIN. And if i use my own name... i don't have to do anything, as i already am a sole proprietor lol.

Step 2: Stop contributing to #1's 403b.

Step 3: Maximize #2's 401k + employer matching + employer contribution = 18k + 9k + 16.2k (assuming i make 270k) = 44.2k

Step 4: Set up separate one-participant 401k. Since i maxed 401k contribution for #2, can't make an employee contribution. However, I can make a maximum of 54k employer contribution. Using your formula, assuming top tax bracket + state taxes, 46% (effective tax probably a little lower). So 0.2 * (net business profit – 0.5*0.46*net business profit) = 0.2 * 0.77 net business profit. So in order to get the 54k maximum, i would need a net business profit around $350,649.35. Which, to be honest, in the best case scenario I would have to hussle to get between jobs #3 and #4 anyways.

= 54k (best case scenario)

Step 5: Maximize 457b from whichever job has best plan = 18k

Step 6: Fund backdoor Roth, $5500 per spouse.

For a total of $127,200. This is not including spouse's own retirement accounts or the mega backdoor stuff.

Further questions:

1. Job #3 is peer review. Job #4 is independent medical examinations. They are separate employers based in separate states. Their job descriptions are also different. Are they still relatable employers if both are 1099? I realize that the question itself is moot as i won't make enough to maximize two 54k buckets per the above formula.

 

Thanks! That helps alot btw. Also, i will see about getting a fee only planner. Initially i held off because, as painful as this is, it forces me to be proactive about my finances and to learn the ins and outs.

 

[spiritrider]

You seem to understand the basics. Two corrections.

Many one-participant 401k providers will require you to get an EIN for the 401k. Personally, I think it is a good idea to have an EIN for a sole proprietorship even using your name. Then you can open financial accounts for the business to more easily keep personal and business expenses separate. It takes 10 minutes online at the IRS website.

The SE tax referred to in the formula for net self-employment income, is self-employment tax from Schedule SE. It is the self-employed version of FICA (Social Security and Medicare taxes) and has nothing to do with either federal or state income taxes.

Since you will have exceeded the SS max wage base, your SE tax will be net business profit * 0.9235 * 0.029. Your net self-employment income will be your net business profit - 1/2 this amount, or net business profit * 0.98660925.

Answering your question. With 1099s from jobs #3 and #4, you do not have "two employers", you are a business with "two clients". You are the employer and employee of your business(es). Even if you did have two separate businesses to service those two clients, they would be related employers, because you are the owner of both businesses.

[jfoxcpacfp]

I clicked on this question just to read what @spiritrider had to say. You got fantastic, spot-on information that might have cost you $1 - $2k elsewhere (not to mention, it may not have been accurate). I am still trying to wrap my head around all of your jobs in multiple states, no less.

In the absence of more specifics, I agree with @spiritrider that an LLC s/n/b necessary. You will be able to take the same deductions and set up the same benefits as a sole proprietor. Same advice for s-corp, although I haven't run the calculations in my spreadsheet. Might try to do so when I'm at the office later. The fact that you have already maximized SS at your main job would certainly raise the threshold of net profits required for it to be beneficial. I applaud your CPA for giving you good advice.

[vibez420]

Awesome, thanks so much guys!!

[rr]

I have a 1099 job and W2 job. I have a 403b with the W2 job and I contributed $18500 to it in 2018 and had a match of something like $16000. I also have a 457b and put $18500 in there, but I don't think that matters for the question I have. I made about $7300 with this 1099 job last year. I contributed about 20% of my 1099 income to a solo 401k as the employer deferral.

My understanding from reading the WCI post on multiple 401ks and the discussion above is that I used up all the employee deferral space to which I am entitled on the 403b and therefore I am not able to make an employee deferral to the solo 401k too.

However, as I'm nearing the end of my tax prep with turbo tax this morning, the program thinks that I can contribute around $5600 to the solo 401k. I assume turbo tax thinks that I can do both an employee and employer deferral to the solo 401k? I entered my 403b contribution in turbo tax so it should know that I made this employee deferral to the 403b. Did something change with the way 403bs are treated with respect to multiple 401k since this post was written or is this just a bug with turbo tax?

[jhwkr542]

Nothing changed afaik, so I think turbo tax just has it wrong.

[jfoxcpacfp]

Your understanding is correct.

@rr 1, TT 0

[spiritrider]

rr wrote:

However, as I’m nearing the end of my tax prep with turbo tax this morning, the program thinks that I can contribute around $5600 to the solo 401k. I assume turbo tax thinks that I can do both an employee and employer deferral to the solo 401k? I entered my 403b contribution in turbo tax so it should know that I made this employee deferral to the 403b. Did something change with the way 403bs are treated with respect to multiple 401k since this post was written or is this just a bug with turbo tax?

Click to expand...

It is really unfortunate, but TurboTax and other tax software do not take a macro view of employee elective contributions across all 401k, 403b, SARSEP and SIMPLE IRA plans. They have all the information necessary reported on your W-2s' Box 12 codes, but they do nothing with it.

While it does not affect you for 2018, you also need to be aware that 403b annual additions (employee + employer contributions) must be aggregated with the annual additions of employer retirement plans (one-participant 401k, etc...) of all businesses your have > 50% ownership.

For 2018 with a 403b $18.5K employee elective contribution and $16K employer contribution. You have no remaining employee elective contribution space and your employer contribution is limited to $55K - $18.5K - $16K = $20,500.

Like I said it does not affect you this year, but if your 1099 revenue grows significantly, one-participant 401k contributions could be limited by 403b annual additions.