Two Jobs, Two Retirement Plans
October 30th, 2015 by Bunch & Brock
Colloquially referred to as “moonlighting” (not to be confused with that much-loved late-1980’s show starring Cybill Shepherd and Bruce Willis), many Americans have a second job in addition to their full-time one. Stories abound of police officers who work as bouncers, teachers who work as tutors, office staffers who drive cabs. It is also common these days for one person to have two sources of income by working a “regular” day job and running a successful small business on the side. Still others cobble together multiple money-making prospects that see them working a combination of days, nights, and weekends. If you are currently engaged in more than one earning opportunity, it’s important to know that there are rules for having multiple retirement plans.
The answer to the question of whether you can contribute to two retirement plans if you have two jobs depends on the connection between your work and how you save. If the businesses have any legal overlap or affiliated relationship, then you cannot contribute to them both. If they don’t, then you can contribute $53,000 per job, up to $106,000 each year, to your defined contribution plans. These plans include workplace 401(k) plans, 403(b) plans, simplified employee pension individual retirement accounts (SEP-IRA) and profit-sharing plans. Your retirement savings, therefore, can be doubled; and because retirement contributions can help shelter income, money you put away from a second job can lessen your tax bill.
If you get paid from an employer that offers a 401(k) plan, you can put away up to $18,000 pre-tax. The maximum amount is $24,000 if you are age 50 or older. Your employer can only contribute the lesser of 25 percent of your compensation or $53,000. Once you max out your 401(k) at work or earn enough through self-employment income to reach the $53,000 contribution ceiling, the best option for most people is usually a SEP-IRA. Your annual SEP-IRA contribution, all of it pre-tax, can be as much as 20 percent of your net earnings, up to the $53,000 maximum.
Those with a lower level of side income may want to consider a solo 401(k), which allows you to pay yourself twice. The “employee” contribution is limited to $18,000, while the “employer” contribution is limited to 25 percent of compensation. These amounts combined cannot be more than $53,000. Remember that employee contributions are aggregated across all your retirement plans. So if you’ve made $10,000 of contributions to your primary job’s 401(k), you can only add an additional $8,000 contribution to a solo 401(k). The deadline for establishing a solo 401(k) is the end of the calendar year (December 31). The deadline for establishing a SEP-IRA is the due date for your 1040, with extensions — meaning you can open one and make 2015 contributions until the middle of October 2016.
Retirement plans and contributions can be hard to understand and to maximize to your benefit. Just because you have one plan set up, doesn’t mean it shouldn’t be reevaluated from time to time. The KY business law and estate planning attorneys at Bunch & Brock have more than 35 years of experience helping clients determine the best course of action for their situation. To get started, or if you have any questions about this topic, call us at 859-254-5522. You can also reach us by filling out this online form.