Multiple Solo 401K

[EM-CCM MD]

First off, sorry if this had been addressed.  I tried the search function, but couldn't get full clarity.

 

I have one more year until graduating fellowship.  I will likely be working in both EM and CCM and I'm trying to compare jobs.  One of the jobs I'm looking at would be roughly split 50:50 between the ED and ICU.  Both the EM and CCM group are separate, small private practice groups at the same hospital.  I would be paid via 1099 by both groups.  Each job will be between $160-220k/y for a total of somewhere between $300-450k/year, all in 1099 income.

 

Would I be eligible for two solo 401k's?  My employers would be unrelated (I would be the only person working for both; the only tie is that they work in the same hospital) and my jobs would be distinctly different.  I realize would likely be limited by my income regarding the salary caps, but I would still put a pretty significant chunk into retirement if I could do 54k of employer contributions on my higher paying 1099 job and 18k + 20% on my lower paying job.

 

Thoughts?  Thanks!

 

Love the blog (and podcast....and book).

[DMFA]

In a solo 401(k), you're the employer. You're related to yourself.

[RosieQ]

Agree. This would work well for another common scenario- one 1099 gig in addition to a main W2 one.

[RosieQ]

Another small benefit of the W2 route I presume is that if you make at least 127k with that job they pay the other half of your social security taxes, essentially getting an 8k raise since you wouldn't have to cover that portion out of any solo practice earnings?

[jfoxcpacfp]

You will be treated the same way whether you open 1 or 2 SOLO-k's: you will be able to contribute $18k as an employee contribution and 20% of the net profits. I see no reason you shouldn't combine the 2 under a single sole proprietorship, LLC, or S-corp and open a single SOLO-k.

[spiritrider]

In case it wasn't clear from the previous posters. This would be what is termed a "controlled group". Since you have >= 80% ownership of both employers, they will be treated as the same employer for retirement plan purposes.

So not only will you have the one employee deferral limit (2017 = $18K), you will only have one annual addition limit (2017 = $54K).

It will not matter how many companies and one-participant 401k plans you have. As Johanna suggested it will be far easier if you have just a single business entity and a single one-participant 401k.

[nephropath]

I'm still not clear on the need (or not) to have multiple solo 401k's...and apologies if this has been answered before, but I could not find a clear answer using the forum search function.

I own 2 business entities that are in completely unrelated fields:

1) medical consulting as a sole proprietorship in my name, with its own EIN, and with a solo 401k attached to that EIN, and

2) an LLC that is a solely owned by me, with a different EIN, that invests in oil & gas working interests, and with no solo 401k

The oil & gas LLC has been contributing to a SEP IRA attached to its EIN, but this is a problem with backdoor Roth conversions, so I have been transferring the SEP IRA into the solo 401k, which is allowed under plan rules.  I really don't want the hassle of opening and maintaining a second solo 401k.

Another option would be for the oil & gas LLC to make contributions directly to the solo-401k established for the medical consulting business. Is it a problem for 2 business entities with different EINs to both contribute directly to the same solo 401k attached to only one of the EINs?

Thanks for any help!

[The White Coat Investor]

nephropath wrote:

I’m still not clear on the need (or not) to have multiple solo 401k’s…and apologies if this has been answered before, but I could not find a clear answer using the forum search function.

I own 2 business entities that are in completely unrelated fields:

1) medical consulting as a sole proprietorship in my name, with its own EIN, and with a solo 401k attached to that EIN, and

2) an LLC that is a solely owned by me, with a different EIN, that invests in oil & gas working interests, and with no solo 401k

The oil & gas LLC has been contributing to a SEP IRA attached to its EIN, but this is a problem with backdoor Roth conversions, so I have been transferring the SEP IRA into the solo 401k, which is allowed under plan rules.  I really don’t want the hassle of opening and maintaining a second solo 401k.

Another option would be for the oil & gas LLC to make contributions directly to the solo-401k established for the medical consulting business. Is it a problem for 2 business entities with different EINs to both contribute directly to the same solo 401k attached to only one of the EINs?

Thanks for any help!

Click to expand...

I guess you could have two solo 401(k)s, but they would share the same $55K limit because they are both owned by the same person. If that were allowed, I'd just split WCI into 4 different businesses and open four 401(k)s.

A 401(k) is attached to a business though, so if you don't make enough in one business to max it out, I guess  you would need two.

[DMFA]

nephropath wrote:

I own 2 business entities

Click to expand...

Done.

Thus the accounts are aggregated under §415(c) limits.  You can still only put $55,000 between all of them.

You could just create a new entity and have the two existing businesses be wholly-owned subsidiaries.  However, the IRS literally disregards all of them.  Single-member LLCs are disregarded entities by the IRS and regards them as the person, not a corporation, and is treated as a sole proprietorship (unless you take an S election to be an S-corp).

Also, sorry to be a bit Cartesian, but ontology is a bit funny in this instance: a sole proprietorship is also not technically an "entity" - it's you.  Only the LLC is an "entity" according to the state, and the IRS disregards it.  So I don't see why you couldn't just have the single self-employed one-participant 401(k).

...also, are you sure that the oil & gas LLC is actually "earned" income for which you can even contribute to a retirement plan?  That sounds more like passive income.

[nephropath]

DMFA wrote:

nephropath wrote:

I own 2 business entities 

…also, are you sure that the oil & gas LLC is actually “earned” income for which you can even contribute to a retirement plan?  That sounds more like passive income.

Click to expand...

Thanks for the great answers WCI and DMFA!

Royalty interest income (from owning mineral rights) is considered passive. However, working interest income (investing in the drilling of the well) is considered active:

https://www.energytaxfacts.com/issues/passive-loss-exception/

"Because of the passive loss exception, working interests in oil and natural gas are removed from the passive income basket. In other words, all oil and gas working interests are considered active, even if the investor is not the operator of the drilling and production operations."

[DMFA]

nephropath wrote:

“Because of the passive loss exception, working interests in oil and natural gas are removed from the passive income basket. In other words, all oil and gas working interests are considered active, even if the investor is not the operator of the drilling and production operations.”

Click to expand...

Oh OK, working interest is the key there.  For some reason I thought it was royalties.  The biggest point of that was to bypass passive activity loss limitation so that the loss could be carried forward to future years, but it also puts the income on Schedule C as "self-employment income" instead of Schedule E.  Looks like that Big Oil lobbying paid off in more ways than one!

[spiritrider]

If DMFA is correct and this is categorized as self-employment income disregard the below text in blue. I am leaving it for anyone this does not apply to, because active income is not necessarily = earned income.

You are confusing the passive versus active income issue with "earned" income. If the "active" income from oil and gas working interests are like "active" income from being classified as a "real estate professional" for Schedule E income.

In both cases it allows you to claim deductions and flow losses through to your personal 1040. However, both are still just investments and neither are considered earned income unless you are engaged in an actual trade or business generating that income.

If this was not earned income and you were never eligible to adopt an employer retirement plan. All SEP IRA contributions would be excess contributions and you have a real mess on your hands.

With such different income sources these two businesses need to remain separate. Normally, IRS regulations require each business to have separate 401k plans, but you should contact your provider. Many one-participant 401k plans will allow you to amend your plan to add additional "affiliated employers".

[nephropath]

spiritrider wrote:

DMFA is correct and you are confusing the passive versus active income issue with “earned” income. The “active” income from oil and gas working interests are like “active” income from being classified as a “real estate professional” for Schedule E income.

In both cases it allows you to claim deductions and flow losses through to your personal 1040. However, both are still just investments and neither are considered earned income unless you are engaged in an actual trade or business generating that income.

This was not earned income and you were never eligible to adopt an employer retirement plan. Therefore, all SEP IRA contributions were excess contributions and you have a real mess on your hands.

Click to expand...

Spiritrider, thanks for your input here and on Bogleheads.  You have been enormously helpful to me in the past.

In this case, however, I must disagree. Royalty income is typically reported on 1099-misc, box 1 and/or box 2 and is reported as income on Schedule E. I have never received royalty income.

Working interest participants are deemed to "materially participate" in the business of extracting oil and gas. Income is typically reported on 1099-misc, box 7 (non-employee compensation), and is reported as business income on Schedule C and is subject to self-employment tax, which I have paid for many years. Both turbotax and my accountant treat the oil and gas working interest income in this manner.

As such, I believe that I am eligible to participate in a SEP-IRA, subject to IRS-defined limits.

 

 

[nephropath]

And....

Thanks for updating your reply Spiritrider, and I'm sorry that I did not see the update before replying.

My original statement stands...you have been enormously helpful, in the past, and present!

You answered my question very nicely in the end!

[spiritrider]

I stand corrected and have edited my post. My original reply was based on your justification in the previous post based on this being "active" rather than "passive" income.

Also, note the last paragraph.

That's ok, note this post is also superseded by on your last post. Life's about timing.