If you work for two businesses that are “related” or “affiliated,” you are treated as working for one employer for the purpose of determining how much can be contributed to your accounts under the employers’ plans. Businesses are usually considered related or affiliated if there is common ownership or if certain business relationships exist. However, there are exceptions. For example, two companies would be considered “related”, if the same five or fewer persons own or control a certain percentage of both companies. Click here to learn about the controlled group rules.

The ideal candidate for  doubling up on contributions are those who are both self-employed while working for another business not owned by you. These can generally be clearly be identified as separate (unaffiliated or unrelated) businesses. For example, assume that you work for  XYZ Super Computer Store, and you are also a real-estate agent on the side. Assume also that you have no ownership in XYZ Super Computer Store and your only affiliation with them is that you work for them as a department manager. Both businesses are clearly unaffiliated and unrelated, which means that if XYZ Super Computer Store offers a profit sharing or SEP IRA plan (for example), you can receive up to $57,000 in profit sharing contributions for tax year 2020, and you can also open a solo 401k sine you are a real-estate agent and also contribute an additional $57,000 to your solo 401k for tax year 2020.

One of the most common questions clients ask about participating in multiple retirement plans is “How do contributions to my solo 401k affect contributions to my day-time employer plan?”  Usually, contributions to a solo 401k plan do not affect contributions to another full-time employer 401k plan, except in the following cases:

• Where multiple employers are related or affiliated and are therefore treated as one employer for purposes of how much can be contributed.
• Salary deferral contributions (employee contributions) to a full-time employer 401(k), 403(b), or SIMPLE plan reduce the amount of salary deferral that can be made to a solo 401(k) plan.
• Contributions to a traditional IRA reduce the amount that can be contributed to a Roth IRA and vice versa.
• Active participation in a solo 401k plan  affect your eligibility for deducting contributions made to a traditional IRA.

Since Roth IRA contributions are never deductible, contributions to a solo 401k plan have no effect on Roth IRA contributions.

Self-employed business owners who open a solo 401k and are interested in adding more funds to Roth accounts, can consider making Roth solo 401(k) contributions. This will afford you, for tax year 2020, to defer up to $19,500, plus an additional $6,500 in catch-up contributions as Roth solo 401(k) contributions. Amounts deferred to Roth solo 401(k)s are subject to the overall deferral limit (employee contribution limit).

Contribute to Day-Time Job and Self-Employed Business 401k QUESTION:

For 2019, my Net Business Profit from Schedule C was $100,292.

I contributed $2,606 to my ex-W2 Job’s 401k as an elective deferral.

I calculate I can contribute the below to my solo 401k plan for 2019:

• Pre-tax Account – Elective Deferral of $16,394 + Profit sharing of $18,800
• After-tax to Roth – $20,806

Can you confirm?

ANSWER:

I understand that:

• You are under 50 years of age
• For 2019, your self-employment income as reported on Line 31 of Schedule C was $100,292
• You contributed $2,606 to the 401k plan sponsored by your w2 employer

SCENARIO ONE: Given this understanding:

• You can contribute  $16,394 as a pre-tax elective deferral to the Solo 401k (as you note below)
• You can contribute $39,606 as a voluntary after-tax account (i.e. $56,000 less  $16,394) provided you make no employer contributions to the Solo 401k.
• In that case, the voluntary after-tax contributions must be deposited into a separate voluntary after-tax account. You could then rollover the voluntary after-tax funds to a separate Roth sub-account for the Solo 401k or a Roth IRA. We will send you a separate email to capture the information needed because the rollover to a Roth 401k or Roth IRA must be reported on a 1099-R.