Question about Employer Roth 401K and Individual Roth 401K

[rtlexx]

Hello everyone.

I have a part time job that allows me to contribute to an employer matching Roth 401K with Fidelity. I also have a personal Roth 401K through Vanguard.

My Employer's 401K allows me to contribute a maximum of $17,500 per year. My personal Roth 401K also allows me to contribute a maximum of $17,000 I believe.

I am not able to work at my part time job enough to make enough money and contribute to the annual maximum to my employer 401K. If I make money working other jobs, can I contribute to my personal 401K as long as the combined total maximum of both 401 accounts does not exceed $17,500 or so?

Thanks,
Rich

[BolderBoy]

I believe you are talking about the salary deferral part of the 401k contribution possibles. (basically, the employee contributes by salary deferral and the employer contributes by profit sharing)

The answer is yes, you may make up to the maximum allowed salary deferral contributions based on your incomes derived from all those work sources.

[rtlexx]

@Bolder Boy.....LOL.....yes, that's exactly what I meant: employee contribution via salary deferral and employer contribution through profit sharing.

That's good to know that I can contribute to 2 different 401k accounts as long as I don't go over the total annual limit.

Thanks,
Rich

[retiredjg]

If I make money working other jobs, can I contribute to my personal 401K as long as the combined total maximum of both 401 accounts does not exceed $17,500 or so?

Maybe I'm reading this wrong, but this sounds like you are working several jobs and want to contribute to a 401k like you would contribute to an IRA. But a 401k is associated with a certain job or business. If you have a personal 401k, that means you own a business and you have set up a 401k for yourself (and maybe other employees) at that business.

I'm wondering if you mean you have an Individual Retirement Account (IRA) instead of a "personal 401k". To contribute to an IRA, you just have to have income - it does not matter which job the income comes from.

If so, the limit for an IRA/Roth IRA is $5,500 this year. And that is independent of the limit of $17,500 in your 401k.

[retiredjg]

I looked at an old thread and apparently what you are calling a "personal 401k" is a "solo" or "individual" 401k. So it is not an IRA as I suspected.

But....if you are a physician, you probably DO NOT want to be using Roth 401k at either of your jobs. The better choice would almost certainly be traditional, not Roth....unless you are making very little money. I suppose some Rothness might be OK if you are just starting out and in the 25% tax bracket.

[rtlexx]

I looked at an old thread and apparently what you are calling a "personal 401k" is a "solo" or "individual" 401k. So it is not an IRA as I suspected.

But....if you are a physician, you probably DO NOT want to be using Roth 401k at either of your jobs. The better choice would almost certainly be traditional, not Roth....unless you are making very little money. I suppose some Rothness might be OK if you are just starting out and in the 25% tax bracket.

Yes, sorry for using the wrong terminology. I have a Fidelity Roth 401K account through my part time job and also an individual 401K that I setup myself through Vanguard. Yes, I am a physician. Please explain your rationale for not contributing to a Roth 401K vs. a traditional 401K. I predict in the future that my income will be much higher than it is now. I'm also predicting that the tax rate will also be higher in the future compared to right now. I would rather pay taxes now on my Roth 401K contributions now than to have to pay a higher percentage of taxes in the future at the time of retirement withdrawl from a traditional 401K.
-Rich

[retiredjg]

Let's assume that your current tax bracket is 35%. To get money into Roth status, you have to pay 35% in federal taxes. More for state taxes. But what if you put the money into traditional instead? When pulling the money out, you would have to have A LOT of taxable income to pull any money out of 401k/IRA in the 35% tax bracket, for two reasons.

1) To even be in the 35% bracket, your taxable income in retirement would have to be as high as it is now. (I'm just working with todays numbers for simplicity). You really think that is likely? Or will your taxable income be less in retirement? Isn't that much more likely? Will you really be pulling $400k (made up number in the 35% bracket) out of your nest egg every year during retirement? And if you do, won't some of that be return of your already taxed money (from your taxable account) rather than from your 401k?

You are confusing wealth with taxable income, but the fact is that many very wealthy people have a low taxable income. Lotta money does not equal lotta taxable income. Far from it.

2) Even if you somehow make it to the 35% tax bracket in retirement, all of your money is not taxed at 35%. Some has no tax (deductions and exemptions), some is taxed at 10%, some at 15%, some at 25%, some at 28%, and some at 33% before you even get to the tier that is taxed at 35%. Why pay 35% on all of it when you could pay less later?

I'm not saying that you should not have any assets in Roth status. And if you are just starting out, maybe putting some in at 25% or even 28% is fine (however I cringe a bit at the 28% part). But there are other ways to get money into Roth status. A good combination is to use traditional 401k and Roth IRA (back door if necessary). Another way is after-tax contributions to 401k (not to be confused with Roth 401k). Or you can retire at 55 and do conversions to Roth IRA for the years before you take SS and start your RMDs. Without more info, it's hard to say much more than those general ideas. Just don't jump on Roth because you think taxes are going up. It doesn't necessarily work that way.

[DSInvestor]

The 17.5K employee contribution limit is shared across all 401k plans. If you contribute 17.5K to the employer plan, you have no room left to make employee salary deferral contributions to the Individual 401k. However your self employed business can still make employer profit share contributions to the Individual 401k. Employer contributions to Individual 401k are always Traditional as they are an expense for your self employed business. The sum of employer and employee contributions to Individual 401(k) maxes out at 50K for 2012 and 51K for 2013.

While the 17.5K limit for employee contributions is shared across all 401k plans, the employer contributions are not. You could potentially contribute 50K employer profit share to your Individual 401k and also contribute 17.5K employee to the other 401k and receive that employer match.

You can also contribute to IRA for your and your spouse on top of your 401k and Individual 401k contributions. If your MAGI permits direct Roth IRA contributions that's great. If not, you can consider backdoor into Roth IRA if you or your spouse don't have any non-Roth IRAs like Traditional IRA, SEP-IRA, SIMPLE-IRA, Rollover-IRA.

[rtlexx]

Okay, so for 2013, I can contribute $17,500 to my employer's 401K plan. And for my individual 401K, I can contribute up to 51K (combined total of employer and employee contributions). I assume that's $25,500 for employer contribution and $25,500 for employee contribution. Is that correct?

Now another question. Assuming all of my contributions are pre-tax, can I use the combined total of $68,500 to deduct from my annual taxes?

[DSInvestor]

Okay, so for 2013, I can contribute $17,500 to my employer's 401K plan. And for my individual 401K, I can contribute up to 51K (combined total of employer and employee contributions). I assume that's $25,500 for employer contribution and $25,500 for employee contribution. Is that correct?

Now another question. Assuming all of my contributions are pre-tax, can I use the combined total of $68,500 to deduct from my annual taxes?

No, that's not correct. Your scenario would have you making 17.5K + 25.5K in employee contributions to all your 401k plans. This exceeds the 17.K limit in employee contributions to 401k plans.

At your main job:
Employer 401(k) employee contribution: $17,500 (this maxes out your employee contributions to all 401k plans).

Your self employed business:
Individual 401(k) employee salary deferral: ZERO (because you've already maxed out the employee contribution in the other plan).
Individual 401(k) employer profit share: up to 51K (if incorporated 25% of self employed W-2 income, if schedule C 20% of net business income).
You would need self employed W-2 income of around 200K or schedule C net business income of 250K to max out the employer contribution for 51K.

Assuming you have sufficient self employment income to max out Individual 401k for 51K, and all contributions were Traditional then all 68.5K would be tax deductible. These tax deductible contributions reduce your Adjusted Gross Income (AGI) which reduces your taxable income which in turn reduces your tax liability.

[rtlexx]

Ok, I got it now.

Now in theory, if I was able to maximize my contributions to my Employer's 401K and my Individual 401K from my personal business (combined total of $68,500), would this entire amount be tax deductible?

[DSInvestor]

Now in theory, if I was able to maximize my contributions to my Employer's 401K and my Individual 401K from my personal business (combined total of $68,500), would this entire amount be tax deductible?

Assuming you have sufficient self employment income to max out Individual 401k for 51K, and all contributions were Traditional then all 68.5K would be tax deductible. These tax deductible contributions reduce your Adjusted Gross Income (AGI) which reduces your taxable income which in turn reduces your tax liability.

[rtlexx]

That actually makes a lot of sense. I don't see myself withdrawing the entire amount of my IRA and 401K at once when I reach retirement age. I will only withdrawl small portions to spend on a yearly basis.

I know when you reach retirement, there is a specific logical order that you are supposed to withdrawl your money to spend across all the accounts that one may have i.e. - savings, checking, IRA, 401K, tax-deffered vs taxable accounts, etc.

Can you go over the correct order of how to withdrawl money from the separate accounts upon retirement?

[DSInvestor]

My last post about the tax deduction for 401k contributions applies only for the year when the contributions were made. If all of your contributions to your 401(k)s are pre-tax, then any money you withdraw from the 401(k) will be taxable as ordinary income. Traditional 401k is tax deferred in that you receive a tax deduction for contribution and taxation is deferred until you withdraw.

If you contribute 17.5K to Roth 401k, you don't get a tax deduction but the money will grow tax free and can be withdrawn tax free. Your employer plan probably offers you the option to make Roth 401k or Traditional 401k contributions.

In the Individual 401k plan, Employer profit share contributions must be TRADITIONAL.

There is no one correct order to withdrawals in retirement as everyone can have very different tax circumstances.

Spending from a Portfolio: Implications of Withdrawal Order for Taxable Investors.
https://personal.vanguard.com/pdf/icrsp.pdf

[retiredjg]

Now in theory, if I was able to maximize my contributions to my Employer's 401K and my Individual 401K from my personal business (combined total of $68,500), would this entire amount be tax deductible?

Assuming you have sufficient self employment income to max out Individual 401k for 51K, and all contributions were Traditional then all 68.5K would be tax deductible. These tax deductible contributions reduce your Adjusted Gross Income (AGI) which reduces your taxable income which in turn reduces your tax liability.

I'll preface by saying this is an area I know little about, but something doesn't feel right here.

Wouldn't the 51k be a tax deduction for the business, not the employee? I just don't see how the employee could have more than $17,500 (plus $5,500 for IRA) that could be tax-deferred each year.

[DSInvestor]

Wouldn't the 51k be a tax deduction for the business, not the employee? I just don't see how the employee could have more than $17,500 (plus $5,500 for IRA) that could be tax-deferred each year.

Self employed folks like S-Corps or sole proprietors have their business income flow through to their personal tax returns.

[retiredjg]

Wouldn't the 51k be a tax deduction for the business, not the employee? I just don't see how the employee could have more than $17,500 (plus $5,500 for IRA) that could be tax-deferred each year.

Self employed folks like S-Corps or sole proprietors have their business income flow through to their personal tax returns.

Oh. I didn't know that. Thanks!