New 1099 income-retirement account help

[WalterWhite]

Hi,

I am current W2 employer who contributes to 401k and 457 retirement plans. I recently started (1 month ago) doing some moonlighting, earning 1099 income. I earn roughly 50,0000 a year as 1099. Can and should I open up a SEP IRA? Would I even be eligible given the 3 of 5 rule as it has only been 1 month that I have been doing this 1099 income? If I can set up a SEP IRA, how do I still perform the backdoor ROTH to avoid the pro-rata rule?

Thank you.

[Larry Ragman]

You could do the SEP IRA, but instead consider setting up a solo 401k. See https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/

[WalterWhite]

I thought about the solo 401k, but wouldn't the solo 401k contributions be combined with the 401k contributions that I receive from my W2 job (around 40k between employer and my) contributions, which only leaves me with putting in 20k from the 1099 income?

[JBME]

You contribute $20,500 to your w2 401k as employee contributions. Then for your solo 401k you can contribute 20-25% of your net profit as employer contributions.

So, Walter White calls this “moonlighting “ now? It’d be funny if he opened a solo 401k as part of his “business”

[WalterWhite]

Would the solo 401k contributions be included in the total 401k IRS limits of 61,000 for 2022 or are solo 401k contributions not included in that total 401k amount?

[spiritrider]

There is a separate (employee + employer) annual addition limit (2022 = $61k) for each unaffiliated employer.

[JBME]

if your 1099 gig is totally unrelated to your W2 gig it's a separate limit. there's a blog post on this if you search for something like multiple 401ks

[WalterWhite]

If you have 2 W2 jobs, one has 401k and one has 403b, is the max you can contribute as employee still 20,500 combined between the 2 accounts or can you put 20,500 into each account?

[spiritrider]

There is a single employee deferral limit (2022 = $20.5K) across all 401k, 403b and SIMPLE IRA plans.

While generally there is a separate annual addition limit for each unaffiliated employer. There is a special rule for 403b plans. 403b (employee + employer) annual additions must be aggregated with one-participant 401k (employee + employer) annual additions.

[WorkforFIRE]

You need to open solo401k that allows after tax contributions so you can do a mega back door Roth.
lots of topics on this forum about it.

this is what I do with my extra 1099 and I’m able to max the 61k

with 50k of your moonlighting, you will be able to hit the max of 61k as well with 20.5k in your work 401K. The remaining 40.5k you will then contribution to your solo401k via pre and after tax or all after tax. I do all after tax bc I want more roth fund, but you can do both.

check out some of my old posts on this topic when I needed help with this same scenario.

[spiritrider]

With 50k of your moonlighting, you will be able to hit the max of 61k as well with 20.5k in your work 401K. The remaining 40.5k you will then contribution to your solo401k via pre and after tax or all after tax. I do all after tax bc I want more roth fund, but you can do both.

.
This is not correct.

Each 401k of unaffiliated employers have a separate (employee + employer) annual addition limit. This is the lessor of the statutory limit (2022 = $61K) or 100% of compensation. Employee + employer contributions of the primary W-2 401k have no effect on a one-participant 401k

With $50K in self-employed earned income (net earnings from self-employment) = business profit - 1/2 SE tax. You can make up to $50k in one-participant 401k contributions.

Note: Self-employed employer contributions are not compensation and therefore reduce compensation. E.g $10K in employer contributions will reduce compensation by $10k.

Maximum self-employed employee after-tax contributions = self-employed earned income - employee deferrals - (employer contributions * 2).

With maximum employer contributions, maximum employee after-tax contributions = $50K - (($50K * 20% = $10K) * 2 = $20K) = $30K. Total annual additions = $10K employer contributions + $30K employee after-tax contributions = $40K.

With no employer contributions, maximum employee after-tax contributions = $50K. Total annual additions = $50K.

[WorkforFIRE]

.
This is not correct.

Each 401k of unaffiliated employers have a separate (employee + employer) annual addition limit. This is the lessor of the statutory limit (2022 = $61K) or 100% of compensation. Employee + employer contributions of the primary W-2 401k have no effect on a one-participant 401k

With $50K in self-employed earned income (net earnings from self-employment) = business profit - 1/2 SE tax. You can make up to $50k in one-participant 401k contributions.

Note: Self-employed employer contributions are not compensation and therefore reduce compensation. E.g $10K in employer contributions will reduce compensation by $10k.

Maximum self-employed employee after-tax contributions = self-employed earned income - employee deferrals - (employer contributions * 2).

With maximum employer contributions, maximum employee after-tax contributions = $50K - (($50K * 20% = $10K) * 2 = $20K) = $30K. Total annual additions = $10K employer contributions + $30K employee after-tax contributions = $40K.

With no employer contributions, maximum employee after-tax contributions = $50K. Total annual additions = $50K.

I think you misunderstood me.

he/she will already put in 20.5k through W2.
the 1099 income of ~50k will allow him to put 40.5k (remaining from the 61k - 20.5k) via pretax and after tax contributions. If not all 40.5, then very close to it. Obviously, he/she will have to do the math. Then can do mega backdoor roth with after tax contributions.

[spiritrider]

I think you misunderstood me.

he/she will already put in 20.5k through W2. His 1099 income of ~50k will allow him to put 40.5k (remaining from the 61k - 20.5k) via pretax and after tax contributions. If not all 40.5, then very close to it. Obviously, he/she will have to do the math. Then can do mega backdoor roth with after tax contributions.

I am not misunderstanding you. You are just incorrect.

As I have already pointed out twice in just this thread. There is a separate annual addition limit for each unaffiliated employer.

Despite the outdated limits, example 1 in the "Overall limit on contributions" section in this IRS link is exactly on point.

This $57,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately.

https://www.irs.gov/retirement-plans...ibution-limits

[WalterWhite]

Hi,

Let me make I understand. Currently I have a 403b option through job 1, 401k option through job 2 and then 50k 1099 income. My understanding is this:

Between the 401k and 403b accounts through my 2 jobs, I can contribute maximum of 20,500 as the employee. The employer contribution for each account is separate obviously.

I can open up a solo 401k for my 50k 1099 income. However, I can't contribute anything into it as an EMPLOYEE because I have already contributed 20,500 as an EMPLOYEE with the 401k and 403b options. Furthermore, it sounds like from the above discussion, that there is a special rule for 403b plans. This rule states that 403b (employee + employer) annual additions must be aggregated with one-participant 401k (employee + employer) annual additions. Assuming my 403b employer matches dollar for dollar, they would contribute 20,500. The employee and employer contributions for 403b would be 41,000, which leaves me with the ability to contribute only 20,000 as the EMPLOYER as part of the solo 401k.

Is this correct?

[spiritrider]

Yes, you have it exactly correct with a small clarification to this paragraph.

Between the 401k and 403b accounts through my 2 jobs, I can contribute maximum of 20,500 as the employee. The employer contribution for each account is separate obviously.

It is not just the 401k and 403b employer contributions that are separate, but also the 401k and 403b (employee + employer) annual additions.