How to Max Retirement Accts. If An Employee + Entrerpreneur?

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Topic Author
TurtleInvestor
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How to Max Retirement Accts. If An Employee + Entrerpreneur?

Post by TurtleInvestor »

So I was doing a little thought experiment in my head and wanted to know if these numbers were right.

Let's say you're an employee earning 45k and you have a business on the side where your net self employment income is 30k.

You can defer a maximum of $16,500 from your employee salary in your 401k right? (assuming the company offers one)

Then you can defer a maximum of 6k (20% of 30k) into a SEP IRA.

And then you can max out the Roth at 5k.

Doing this would save you a heck of a lot on taxes wouldn't it, especially deferring the max on your employee salary as that would put you in a lower tax bracket?

Is there some sort of rule where contributions to a 401k affect/limit contributions to a SEP IRA? I assume there isn't because they're separate sources of income. But I think I remember reading somewhere that there was a maximum number you could invest across all retirement accounts in a given year, maybe like 50k or something? Well that doesn't apply here in this example, but I'm curious if such a rule exists.

If all this holds up, that's a total of $27,500/year invested, assuming you can live off the remainder which you probably could.

Boglehead professors, please review this thought experiment to see if these answers are correct :)
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PaddyMac
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by PaddyMac »

I believe you're correct. I know $50K is the max for this year, and I'm assuming that applies to employees with side-businesses as well as 401k.

We get all self-employment income and we will get close to the max this year PLUS we can have an extra $5500 catchup contribution in our 401k because we are over 50. So that's $55,500.

The only drawback is that the closer you get to the max, the more likely it is that you have so much income that you can't contribute to a Roth. And if you want to do the backdoor Roth, then your SEP-IRA would be affected so the backdoor is not an option for us.
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TurtleInvestor
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by TurtleInvestor »

PaddyMac wrote:I believe you're correct. I know $50K is the max for this year, and I'm assuming that applies to employees with side-businesses as well as 401k.

We get all self-employment income and we will get close to the max this year PLUS we can have an extra $5500 catchup contribution in our 401k because we are over 50. So that's $55,500.

The only drawback is that the closer you get to the max, the more likely it is that you have so much income that you can't contribute to a Roth. And if you want to do the backdoor Roth, then your SEP-IRA would be affected so the backdoor is not an option for us.
:shock: Wow. You must be making a ton to get to the max! Do you use a Solo 401k? SEP IRA? Defined benefit plan? Just curious to see what people with that high of an income use.
sunnyday
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by sunnyday »

You're correct. One of the things I'm greatest for from this forum is how much I realized I can save on taxes. I have a lot of options and tax free space -- 403b, 457, Roth, SEP, and pension contribution. If maxed, the total is about $50k each year.
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TurtleInvestor
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by TurtleInvestor »

sunnyday wrote:You're correct. One of the things I'm greatest for from this forum is how much I realized I can save on taxes. I have a lot of options and tax free space -- 403b, 457, Roth, SEP, and pension contribution. If maxed, the total is about $50k each year.
Nice! You must work for the government and have your own business right? That's a boatload of taxes you're saving :)
Default User BR
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by Default User BR »

TurtleInvestor wrote:But I think I remember reading somewhere that there was a maximum number you could invest across all retirement accounts in a given year, maybe like 50k or something? Well that doesn't apply here in this example, but I'm curious if such a rule exists.
Not really. The 50k limit is all contributions to a particular employer. An unrelated plan has its own limit. This does not apply to the 17k employee elective deferral/designated Roth contribution limit, which does apply across all plans. See the IRS article:

http://www.irs.gov/retirement/participa ... 34,00.html


Brian
Gustie13
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by Gustie13 »

Don't mean to hijack a thread, but what other options are out there for someone in a 'traditional' employee role (large corporation) with no side businesses besides making max contributions to 401k and IRA? Just a simple brokerage account with funds in them? Does anyone have a side business with one of the major goals to be funneling more money into 401k/IRAs?
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PaddyMac
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by PaddyMac »

I stand corrected (see Brian's link above). Looks like you have to pool together the $17K employee deferral, but you can use the $50K limit just for the SEP-IRA (or your employer contributions to solo 401k). Of course, you have to be making a ton to do this since it's based on 20% of self-employment income! If I was making $250K on a side business I would not be working for anyone else!

Note that the Roth-IRA is completely separate and not included in the $50K; it has its owns rules (income limitations).
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PaddyMac
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by PaddyMac »

Gustie13 wrote:Don't mean to hijack a thread, but what other options are out there for someone in a 'traditional' employee role (large corporation) with no side businesses besides making max contributions to 401k and IRA? Just a simple brokerage account with funds in them? Does anyone have a side business with one of the major goals to be funneling more money into 401k/IRAs?
Don't downplay the "simple brokerage account". Our taxable account is what will allow us to retire before 59.5 . After tax money is easy to get to in a pinch too. At the end of the day, just save money...
Grt2bOutdoors
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by Grt2bOutdoors »

Gustie13 wrote:Don't mean to hijack a thread, but what other options are out there for someone in a 'traditional' employee role (large corporation) with no side businesses besides making max contributions to 401k and IRA? Just a simple brokerage account with funds in them? Does anyone have a side business with one of the major goals to be funneling more money into 401k/IRAs?
401K to the max
IRA to the max
I-Bonds to the max (tax-deferral up to 30 years)
Tax-Efficient 3 Fund or Slice n Dice portfolio - unlimited. Consider use of municipal bond fund if current tax rate is high.

There is virtually no maximum that could potentially be squirreled away for a particular goal. Just don't do what some folks I knew did, which is squirrel everything away for retirement only to be struck down by one illness or another just prior to it. Balance in everything, otherwise you will just be saving your money for someone else to enjoy.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Default User BR
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by Default User BR »

Gustie13 wrote:Don't mean to hijack a thread, but what other options are out there for someone in a 'traditional' employee role (large corporation) with no side businesses besides making max contributions to 401k and IRA? Just a simple brokerage account with funds in them? Does anyone have a side business with one of the major goals to be funneling more money into 401k/IRAs?
Some company plans will allow after-tax non-Roth contributions above the 17k deferred/Roth limit. If so, AND the plan allows in-service rollover of these contributions, this is another avenue. Those can be rolled out to a Roth IRA or possibly converted to Roth 401(k) via in-plan conversion.

This is not all that common, but is at least worth checking.


Brian
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TurtleInvestor
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by TurtleInvestor »

Default User BR wrote:
TurtleInvestor wrote:But I think I remember reading somewhere that there was a maximum number you could invest across all retirement accounts in a given year, maybe like 50k or something? Well that doesn't apply here in this example, but I'm curious if such a rule exists.
Not really. The 50k limit is all contributions to a particular employer. An unrelated plan has its own limit. This does not apply to the 17k employee elective deferral/designated Roth contribution limit, which does apply across all plans. See the IRS article:

http://www.irs.gov/retirement/participa ... 34,00.html


Brian
I'm not sure what you mean by "This does not apply to the 17k employee elective deferral/designated Roth contribution limit, which does apply across all plans". Can you please elaborate?

I thought the 17k employee elective deferral only applies to the employer plan? And the Roth contribution limit is independent isn't it? It's separate and has its own limit.
xerty24
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by xerty24 »

TurtleInvestor wrote:I'm not sure what you mean by "This does not apply to the 17k employee elective deferral/designated Roth contribution limit, which does apply across all plans". Can you please elaborate?

I thought the 17k employee elective deferral only applies to the employer plan? And the Roth contribution limit is independent isn't it? It's separate and has its own limit.
He meant what he said - you get $17k in total of elective deferrals, pretax or Roth in combination, across all 401k plans you may be covered by. Non-elective deferrals, which include matching, employer profit sharing, and non-deductible employee contributions have a $50k per plan aggregate limit (aggregate meaning including elective deferrals to that plan too). IRAs have their own independent limits, although deductability may depend on what you do with the employer plans.
No excuses, no regrets.
Gustie13
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by Gustie13 »

Thanks for the advice Paddy, Brian, and Outdoors!
snowx800
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by snowx800 »

Hi guys I think I have this right I own a business.
I use a simple Ira max out at $11500
Max out Roth $5000
With being a owner and I also take a job from another company for say
$30000 can I also max out the new 401k
Thanks
Default User BR
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by Default User BR »

xerty24 wrote:He meant what he said - you get $17k in total of elective deferrals, pretax or Roth in combination, across all 401k plans you may be covered by.
It also includes other elective deferrals/designated Roth contributions, such as 401(b) plans or the TSP.


Brian
Topic Author
TurtleInvestor
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Re: How to Max Retirement Accts. If An Employee + Entrerpren

Post by TurtleInvestor »

xerty24 wrote:
TurtleInvestor wrote:I'm not sure what you mean by "This does not apply to the 17k employee elective deferral/designated Roth contribution limit, which does apply across all plans". Can you please elaborate?

I thought the 17k employee elective deferral only applies to the employer plan? And the Roth contribution limit is independent isn't it? It's separate and has its own limit.
He meant what he said - you get $17k in total of elective deferrals, pretax or Roth in combination, across all 401k plans you may be covered by. Non-elective deferrals, which include matching, employer profit sharing, and non-deductible employee contributions have a $50k per plan aggregate limit (aggregate meaning including elective deferrals to that plan too). IRAs have their own independent limits, although deductability may depend on what you do with the employer plans.
Ah I got it now. I think all these terms keep on screwing with my head.

So going back to my example, the guy could elect to defer a max of 17k in his 401k AND also include up to 33k (which would NOT be deductible) (for a max of 50k - 17+33) of matching, employer profit sharing, and non-deductible employee contributions.

Then he could deduct 6k for his SEP IRA and 5k for his Roth.

That 50K limit only applies to the employer plan and has nothing to do with the SEP IRA and ROTH since those are separate and include their own contribution limits.

Did I get it right?
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