Maximizing Retirement Investments with Multiple Plans

Every so often I say something that starts a firestorm or causes my inbox to overflow. Since the laws of nature state I am one human being and have a limited amount of time to read and answer emails, most emails go unanswered unless from a current client.

It may have been something I said in a podcast or new readers enjoying a deep drink of my lovely prose triggering the question in question. (Yes, I wrote that intentionally.) The latest question storm revolves around retirement plans. The questions are all the same with slight nuances. As a human being with limited time to dedicate to cold call questions, I left most unanswered and the few I did respond to were given quick and to the point answers. And as I fired off these quick answers it occurred to me I misinterpreted the question asked in some cases. A fresh blog post on the subject should clear that up. If not, some ointment might also do the job.

The question stuffing my email is this: Can I have more than one retirement account? My accountant told me I can’t contribute to an IRA if I have a retirement plan at work. Is she right? We will address this line of questioning in a bit. There is a small twist to the question from some readers. Can I have two retirement plans in my business or side gig? I sent many a quick answer as follows: In most cases there is nothing in the Code disallowing such action, but it would be impractical to do so. My answer is wrong! I should have left questions unanswered if I didn’t have time for an adequate response.

The Skinny on Retirement Plans in Your Business

My answer wasn’t completely wrong, just wrong in many cases when you include the facts and circumstances of the questioner’s situation.

A small business can have two retirement plans, just not at the same time! Your side gig may have a solo 401(k), what Fidelity calls a Self Employed 401(k). The side gig may take on a life of its own and employees enter the scene. The solo 401(k) is no longer allowed. You have many options. For example, you might replace the solo 401(k) with a traditional 401(k) or a Simple 401(k) or a SIMPLE IRA. We will leave the characteristics of each retirement plan for another day. Today we will focus on when you can have more than one retirement plan at a time.

What is NOT allowed is a SIMPLE IRA plan and a 401(k) at the same time. Other restrictions exist. For example, a SIMPLE IRA cannot be shut down during the year. You must inform employees the SIMPLE plan will terminate at the end of the year before November 2^nd of the current year.

Each retirement plan has its own limitations. The real question I am getting in emails is: Can I stack retirement plans to increase my retirement plan contributions? The answer is yes in most cases, but not within your business.

If you have two employers you can participate in both employers’ retirement plan as long as you don’t exceed the contribution limits. The 401(k) annual contribution limit is $18,000 per year with an additional $6,000 per year allowed for taxpayers age 50 or older.

Another limit facing all taxpayers in the ultimate retirement plan contribution limits of $54,000 annually, $60,000 for taxpayers age 50 and older. This $54,000/$60,000 limit includes the employer’s match! If you plan on maximizing your retirement plan contributions you need to track the employer match as well to avoid exceeding the limit.

If you have a 401(k) at your job you are allowed a solo 401(k) in your side gig or a SIMPLE IRA or other retirement plan that fits your needs as long as contribution limits are not exceeded. There are some limitations if you have ownership in your employer.

Some government employees have a 457 plan. The 457 contributions are not considered salary deferrals so you can load up the 457 plan while simultaneously filling a 403(b) or 401(k) in a side business or separate employer. The $18,000 ($24,000 age 50 and older) applies to the 457 plan and a 401(k)/403(b) plan at a separate employer. In effect, you can drop $18,000 into each retirement account.

The 457(b) plan also has a unique feature for taxpayers age 50 and over and within three years of retirement. Readers in this situation can reader more about the catch-up features of their retirement plan here.

Personal Retirement Plans

The questions that perplexed me the most claimed their accountant said they can’t contribute to an IRA if they have a retirement plan at work. It did not make sense to me at first. Unless limited by the $54,000/$60,000 limit, you can contribute to an IRA even if you have a retirement plan at work. What I think happened was readers misinterpreted what their tax professional said. IRA contributions are allowed, but may not be deductible.

Traditional and Roth IRA contributions allowed begin to phase out as your income increases until no contribution is allowed. However, a spousal IRA may be allowed if only one spouse has employment.

Too Many Choices

I included multiple links in this post rather than muddy this discussion with too many sidebars on separate types of retirement plan rules. The real problem is the number of choices. The reason so many ask about their retirement plan options is because the choices are endless. There are a limited number of plans, but the way the plans can be used produces a mind-boggling amount of choices and restrictions. My office is filled with books on this stuff. The answer is not always as simple as we would like it to be. (If you want to get serious about how retirement plans work, here is one book to start with.)

I think it is a mistake to answer these kinds of questions in a quick fashion as a favor to the reader. A quick, short answer means I didn’t crack open the books and verify what was being asked. This means I probably gave a half answer or worse, an incorrect one.

If I don’t answer an email question, do not be offended. I am not a free tax service so when I answer a quick question it is out of weakness. As this blog grows that weakness is getting crushed and that is a good thing.

There is a better chance I will respond to a comment. Answering the same email 68 times is a poor use of time when I can answer it once for all to benefit from.

It is with heavy heart I must inform you I will no longer answer personal tax questions unless you engage my services. I accept a small number of new clients per year. If you are looking for consulting I have more time available for that. Tax season is already stuffed to the rafters. There is a fee for my time. Rather than try to answer a bunch of questions halfway, I will serve paying clients with a complete answer. Many times I need to do research. I know a lot, but not everything. I open the book often.

Some things to consider: If you want to hire me I require a detailed outline of your questions in advance, plus a copy of your two most current tax returns. I disclose my fee when I offer engagement. It changes from time to time so I stopped publishing my regular fees. Be aware I am not cheap. It’s just a matter of economics. Too many people want me so fees are part of the filtering process.

Consulting conversations are on Wednesday only. I research and run my practice the rest of the week. I dedicate Wednesday to the phone or in person consultations. Be aware I am always scheduled out two months or more for consultations. If you need something this afternoon there is no way I can fit it in.

I love my work and want to serve as many people as possible. To do that I must firm-up my processes. I send all emails to my office manager, Karen, after I give them a quick review. I love compliments, suggestions and concerns I may have said something wrong in a post. I read them all. Karen decides which clients we can take on before contacting them. I accept 3-5 new consulting jobs per week max while I receive over 80 requests per week and growing. Please understand my time constraints.

Finally, I want to let you in on a little secret about tax professionals. When a tax pro prepares a tax return they get paid for the service. Many of these pros feel obligated to answer questions and consult for free because they prepared the return. This is unfair to the tax pro and leads to poor consulting. Tax pros frequently require research. This takes time and time is money. I am not the only good tax guy out there. You become a priority when the work involved includes some income with it. Demand your tax pro invoice you for consulting and demand adequate research connected to the fee-based consulting. This will divert questions from me to highly qualified tax pros in your local community.

Hopefully I whet your appetite on maximizing your retirement contributions today. Use the links to further your education. Use the comments for tax questions and if time permits I will answer your question. You can also contact me if you wish to hire my services. The best news of all: I have no problem working with your accountant to carry out a tax strategy. Once your tax pro knows how to use a tax saving strategy they can spread the good news to all their clients. We need to grow this thing so all middle class Americans get the same high quality tax advice the wealthy do at a price they can afford.