Two Retirement Plans
I have a client who is an employee and contributes to a 401k plan. He also operates another business as a sole proprietor. The company showed a loss of $21,000 last year on $120,00 of gross revenues. Is he able to set up a retirement plan for this business in addition to contributing to his 401k plan at his employer?
Permalink Submitted by William Tuttle on Sat, 2024-02-17 12:33
There is a single employee deferral limit across all 401k, 403b and SIMPLE IRA plans.
There is a separate (employee + employer contributions) annual addition limit for each unaffiliated employer.
Under 401(c)*, in order to meet the definition of a self-employed individual eligible to adopt, maintain and contribute to a 401k. The taxpayer must have self-employed earned income (business profit – 1/2 SE tax), in the current or any prior year.
Even if an employer retirement plan could be adopted due to self-employed earned income in any prior year. Self-employed contributions can only be made for years with self-employed earned income.
Both line: Yes, a one-participant 401k can be adopted by a self-employed individual who is an active participant in a 401k plan from another unaffiliated employer. However, no current year self-employed earned income, no current year employer retirement plan contributions. No contributions for a year with losses.
Not to mention, no IRA compensation (self-employed earned income + W-2 Box 1 wages), no IRA contributions.
*The tax code for SEP IRA 408(k) and SIMPLE IRA 408(p) incorporate 401(c). Those plans would also be subject to the requirements of 401(c).