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Understanding multiple 401k/403b limit correctly

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  • Understanding multiple 401k/403b limit correctly

    Can anyone clarify if I am understanding my 403b yearly limit correctly with regards to opening a solo 401K?

    I primarily am employed and paid on a W2. I contribute 18K of employee contributions to a 403b, and my employer matches quite nicely and essentially gets me up to 53K with the match.

    Does this mean for my side 1099 independent contractor gig that I cannot open a solo401k and contribute the 20% of employer contributions to this new 401k, according to rule #7 on https://www.whitecoatinvestor.com/multiple-401k-rules/ ?

    Thanks

  • #2
    Correct.  You are limited to $54k in total contributions (employee and employer) into both plans, so maxing out 403b will not allow you to contribute to a solo 401k.  However, if your 1099 income is high enough you might be a good candidate for a Cash Balance plan (35+, ideally closer to 40, and 1099 income at least $300k or so, AND a stable source of income for at least 5 years, though ideally until retirement).
    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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    • #3
      what would you consider high enough income for a 1099? I'd probably only approach about 25K per year

      Comment


      • #4




        what would you consider high enough income for a 1099? I’d probably only approach about 25K per year
        Click to expand...


        $25k is good enough for a solo 401k, for Cash Balance plan you need $300k or so ideally.
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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        • #5
          ok thanks. I max out my 403b so i guess it's on to taxed accounts!

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          • #6
            What if one leaves mid year a job that had a 403(b) and moves to a job with a 401(k) retirement plan? Do the multiple retirement plan rules hold at that point?

            Example:

            1) Work for company A with 403(b) plan and deposit $6000 in employee contributions with $12,000 of employer contributions by June 30, 2018.

            2) Leave company A for company B and make $12,500 in employee contributions (up to the max of $18,5k employee contributions for 2018) and receive a match of ~$20,000.

            3) Rollover entirety of 403(b) to new 401(k) in month of July.

            4) As as result, total employee ($18.5k) and employer ($32,000) of contributions for 2018 will have been made.

            Do the rules regarding 403(b)s aggregating with other controlled plans still apply, given that one might no longer have a 403(b), per above assumptions, after July 2018?

            Thoughts?

            Thanks in advance.

            SR

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            • #7




              What if one leaves mid year a job that had a 403(b) and moves to a job with a 401(k) retirement plan? Do the multiple retirement plan rules hold at that point?

              Example:

              1) Work for company A with 403(b) plan and deposit $6000 in employee contributions with $12,000 of employer contributions by June 30, 2018.

              2) Leave company A for company B and make $12,500 in employee contributions (up to the max of $18,5k employee contributions for 2018) and receive a match of ~$20,000.

              3) Rollover entirety of 403(b) to new 401(k) in month of July.

              4) As as result, total employee ($18.5k) and employer ($32,000) of contributions for 2018 will have been made.

              Do the rules regarding 403(b)s aggregating with other controlled plans still apply, given that one might no longer have a 403(b), per above assumptions, after July 2018?

              Thoughts?

              Thanks in advance.

              SR
              Click to expand...


              That's a great question.  My understanding is that if you had a 401k and move to a job with another 401k, you get two $55k limits if you change jobs mid year (your salary deferral limit is the same $18.5k), with the exception of the 403b/401k pair.  This is because it does not matter what the source of contribution is, IRS limits the total to $55k, even if you initially had two separate jobs at the same time.  So for that reason I believe that rules aggregating 401k/403b contribution still apply.  You are under the total limit of $54k for 2017, so you are fine. I would actually talk with your 1st company and find out (since they have a 403b, they should know the rules).
              Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

              Comment


              • #8
                The $18.5K employee deferral limit is across all SARSEP IRA, SIMPLE IRA, 401k and 403b plans. The $55K annual addition limit is separate for each unaffiliated employer plan. The unique annual aggregation rules only apply to a 403b.

                If a 403b participant is "not" a > 50% owner of a business Then the 403b is considered solely controlled by the participant. The 403b is not aggregated with any other plans of the 403b employer.

                If a 403b participant is a > 50% owner in any business. Then the 403b is considered controlled by both the 403b participant and the 403b employer. The 403b must be aggregated separately with both any other plans of the employer and any employer plans of any business > 50% owned by the 403b participant.

                Since in either case the participant is at least in control of there own 403b. All 403b plans are aggregated.

                In your example, the 403b and 401k plans are from different unaffiliated employers. The employee deferral limit applies as always, but the annual addition limit does not apply to the 403b and the 401k. They each get a separate annual addition limit. However, if you were to own > 50% in any business. Any employer plan of the business (es), is(are) aggregated with any 403b plan.

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                • #9
                  So, just to clarify, even if one terminates employment with an employer with a 403(b) mid-year, the fact that one placed any monies into that 403(b) forces aggregation with a different non-controlled group 401(k) or with a solo-401(k).  Stated another way, if one puts $20,000 of employee and employer contributions into a 403(b) and terminates employment with that employer in June, one would be limited to $35,000 EMPLOYER-based that they could put into a solo-401(k) ($55k for 2018 - $20k for 2018 contributions already made to the 403(b)? Or because termination of employment with the employer with the 403(b) is final and complete, one would be allowed to put $55k in employer contributions into a solo-401k.

                  Obviously, several W2 jobs and a substantial side gig is involved here, which is why I pose this question.

                  Thanks to the both of you. Your input is greatly appreciated and beneficial to many.

                  SR

                  Comment


                  • #10
                    Annual addition aggregation rules apply across the contribution year. It does not matter if you are or are not still at a particular employer.

                    A 403b is not aggregated with any of the other qualified plans of employers you have a <= 50% ownership. A small correction. Only the 50% rule applies. Controlled group rules are different and actually can be more lenient.

                    If your total employee + employer contributions to any 403b at any time in 2018 are $20K. Then your one-participant 401k employee + employer contributions plus any such contributions at any other employer plans of other businesses with a > 50% ownership are limited to $35K.

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                    • #11
                      Spirit Rider,

                      Thank you, once again, for the impeccable explanation and clarification of my somewhat unique circumstance.  It was impossible to find this info online (even after months of research and a good fundamental knowledge of this stuff) due to the difficulty with recreating the exact scenario. I think I've finally got it! Thanks, Kon, too!

                      Cheers!

                       

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