One of the most common questions around solo 401k eligibility is: Can I contribute to a solo 401k if I also receive a 401k plan at my day job?
As long as you meet the eligibility requirements of a solo 401k, you’re allowed to contribute to both plans if you receive a 401k at your work. However, your employee contributions across both plans are aggregated, so you need to make sure that you don’t overcontribute to either plan.
How to contribute to both accounts
If you have both a solo 401k and a 401k plan at work, then additional calculations may be required to make sure that you don’t overcontribute to your accounts, specifically on the employee side.
Employee contributions are aggregated across both plans.
With a regular 401k plan, you make contributions as the employee and your employer may also offer matching contributions. As an employee, your contribution limit of a regular 401k is $20,500 for 2022 and $22,500 for 2023. If you’re over the age of 50, you also get catch-up contributions bringing your limits to $27,000 for 2022 and $30,000 for 2023.
With a solo 401k, you get to contribute as both the employer and the employee. The employee contribution limits are the same as a regular 401k. Employee contribution limits are per person, not per plan. So if you contribute $10,000 to your company 401k, then you can only contribute $12,500 as an employee to your solo 401k.
Employer contributions stand alone
While employee contributions are aggregated, employer contributions stand alone. With a regular 401k, you cannot contribute as an employer since you are not an employer and only an employee. With a solo 401k, you have greater control over your contributions types and can choose to allocate your contributions however you wish.
For example, if you max out your regular 401k at work, that means that you cannot contribute any income as an employee to your solo 401k. However, you could still choose to max out your solo 401k through employer contributions only.
If so, you could contribute up to the solo 401k limit, which is $61,000 ($67,500 if age 50+) for 2022 and $66,000 ($73,500 if age 50+) for 2023. Employer contributions are calculated using 25% of compensation if the business is incorporated and 20% if the business is not incorporated.
Generally, for catch-up contributions to be applicable to any 401k plan, you must first max out your employee contributions.
However, because the two plans use the same employee contribution limits, you could choose to apply your catch-up contributions to either account. For example, let’s say that your regular 401k plan at work does not offer the option to add on catch-up contributions. You could then choose to apply your catch-up contributions to your solo 401k employee contributions.
More investment options and a Roth account
The best solo 401k plans come with a Roth option and let you invest in any asset class. A 401k, on the other hand, has lower contribution limits, often doesn’t come with a Roth option, and only lets you invest in a handful of mutual funds. You can’t invest in individual stocks, ETFs, or alternative assets like crypto and real estate.
The main consideration on how to allocate your contributions to both plans boils down to employee contributions (since they’re aggregated for both accounts).
Do you plan on contributing to a Roth account?
Your solo 401k could come with a Roth option, but your regular 401k may only offer a traditional pre-tax account. Only employee contributions can be put into a Roth account, so if you max out your regular 401k, you won’t have any room left over to contribute as an employee to your solo 401k.
If you prefer Roth contributions in order to get tax-free withdrawals in retirement, prioritizing your solo 401k employee contributions could make more sense.
Does your employer offer 401k matching?
Let’s say that you want to max out your Roth contributions for the year, but your regular 401k does not offer a Roth option. In this case, it makes sense to max out your employee contributions to your solo 401k instead.
However, if your employer offers an employer match, then it usually makes the most sense to contribute enough money to your regular 401k to receive the maximum employer match contributions.
What is the maximum I can contribute to both plans?
If you have both a 401k and solo 401k, technically, you can contribute double the 401k contribution limits.
- The contribution limit of a 401k and solo 401k for 2022 is $61,000 ($67,500 if age 50+).
- The contribution limit of a 401k and solo 401k for 2023 is $66,000 ($73,500 if age 50+).
For example, if, in 2022, you’re under 50 years of age and have both a 401k and solo 401k, you could contribute $61,000 to your solo 401k and also up to $61,000 to your 401k.
However, in order to do so, you must max out your regular 401k employee contributions of $20,500. Then, your employer must contribute $40,500 to your plan. That satisfies the 401k contribution limit of $61,000 for 2022.
Then, you must contribute $61,000 as an employer (since employee contributions are now maxed) to your solo 401k. In order to do so, your business needs to make enough money, since employer contributions are calculated as 25% of compensation if the business is incorporated, and 20% if the business is not incorporated. To max out your solo 401k, your business would need to have made $244,000 if incorporated and $305,000 if not incorporated.
Given that most employers will not contribute $40,500 to your 401k plan in a given year, the more likely scenario is that you max out your regular 401k plan at work ($20,500) and also max out your solo 401k through employer contributions ($61,000) giving you a total contributed amount of $81,500 for the year.