IRA/401K and Simple IRA
Could someone explain to me why it is OK to max out both a 401K/IRA at one’s job at company A while simultaneously maxing out the contributions (i.e. unrelated to what the contribution was in Company A) to Company B’s Simple IRA plan as long as Company A and Company B have no relationship to one another? This was explained to me years ago by a Pension Expert (large owner of national firm) and a couple IRS agents and had something to do with the fact the companies are completely separate entities and ERISA as I remember. This flew in face of what I thought I understood from IRC. At the time, I called IRS, and their senior agent confirmed the experts were correct, but I don’t remember the detail of why.
The example they gave was as follows:
Employee A works for Company A and puts maximum allowable contribution in Company A’s 401k plan.
Employee A also is Sole Prop Owner of an unrelated Company B. Company B has a Simple IRA, for example. Employee A can also max out their contribution to Company B’s Simple IRA regardless of what they put in Company A’s 401K or IRA.
On the other hand, Company A can not have both a 401K and Simple IRA and allow Employee A to max out contributions to both because they are offered by the same business entity.
Can someone explain this to me?
Permalink Submitted by Alan - IRA critic on Wed, 2013-01-30 21:29
Sec 408(p)(2)(d) states that a SIMPLE IRA must be the sole plan of an employer, therefore it could not operate a SIMPLE IRA alongside a 401k plan. Conversely, if a sole propreitor with a SIMPLE IRA works as an employee for a different company, this person can contribute to both a SIMPLE IRA and the 401k. That said, the total salary deferral cannot exceed the 401k deferral limit of 17,500. The SIMPLE IRA has a limit of 12,000. Therefore, if the max 12,000 is contributed to the SIMPLE IRA, then only 5,500 can be deferred into the 401k plan. In your example, if the employee maxed out the 401k at 17,500 he would not be able to contribute to his SIMPLE IRA.