When you’re working two jobs or running a side business along with your day job, figuring out retirement contributions can get a bit tricky. This article breaks down how much you can put into your retirement accounts under these circumstances.
What are the Contribution Limits?
When you’re earning from more than one job, it’s crucial to understand how much you can contribute to your retirement plans without breaching IRS limits. The individual contribution limit across all 401(k) plans is $22,500 if you’re under 50, and $30,000 if you’re over 50, thanks to a $7,500 catch-up allowance.
However, there’s more to it. The total contribution limit per employer, including both employee and employer contributions, is $66,000. This means if you’re employed by two companies with no overlapping legal interests, you could potentially contribute up to $132,000 in total (2 x $66,000) across both jobs.
It’s crucial to remember that your own contributions across all plans can’t exceed the personal limit of $22,500 or $30,000 if you’re eligible for catch-up contributions.
For self-employed individuals or those running a side business, similar rules apply. The total limit for plans like SEP IRAs and solo 401(k)s is also capped at $66,000. Keeping track of these limits ensures you’re maximizing your retirement savings without risking penalties for over-contributing.
What About 401(k)?
401(k) plans are one of the most common retirement savings vehicles, especially for employees in larger organizations. If you work two jobs, each offering a 401(k), you have the opportunity to contribute to both.
However, the key here is to remember the individual contribution limit of $22,500 (or $30,000 with catch-up contributions).
Solo 401(k)
For those with a side business, a solo 401(k) presents an attractive option. It allows you to contribute as both the employee and the employer.
The employee contribution is capped at the standard 401(k) limit ($22,500 or $30,000), but you can also add employer contributions, up to 25% of your compensation.
The dual contribution structure makes the solo 401(k) a powerful tool for maximizing retirement savings. However, it’s important to note that employee contributions across all your 401(k) plans are aggregated.
So, if you max out your contributions at your primary job, this limits what you can contribute as an ’employee’ to your solo 401(k).
What is SEP IRA?
A Simplified Employee Pension (SEP) IRA is an ideal retirement savings option for self-employed individuals or small business owners. Unlike traditional 401(k)s, contributions to a SEP IRA are made solely by the employer – which in the case of self-employment, is also you.
The contribution limit for SEP IRAs is $66,000, or 25% of compensation, whichever is lower. SEP IRAs offer a high degree of flexibility, particularly in terms of funding.
Contributions can be varied each year, allowing you to adjust based on your business’s profitability. This makes them particularly attractive for entrepreneurs with fluctuating income.
Plus, you can set up and contribute to a SEP IRA up until the tax filing deadline, including extensions, giving you additional time to fund the account.
The flexibility, combined with high contribution limits, makes SEP IRAs a popular choice for many business owners and freelancers.
| Eligibility | Self-employed individuals, small business owners |
| Contribution Type | Employer only (self-employed individuals count as employer) |
| Contribution Limit | $66,000 or 25% of compensation, whichever is lower |
| Contribution Flexibility | Can vary each year based on profitability |
| Funding Deadline | Up until tax filing deadline, including extensions |
| Key Benefit | High contribution limits, flexibility for fluctuating incomes |
Extra Savings for Those Over 50
Individuals over the age of 50 have a unique advantage when it comes to saving for retirement – the ability to make catch-up contributions. This provision allows you to contribute beyond the standard limits.
For 401(k)s and similar plans, this means an additional $7,500, bringing the total personal contribution limit to $30,000. This benefit extends to IRAs as well, where the catch-up contribution is $1,000, raising the total to $7,500.
The rationale behind this is simple yet powerful. As you near retirement, you might find yourself in a better financial position to save more, or you may realize the need for more substantial savings.
Catch-up contributions are an excellent way to bolster your retirement funds, giving a significant boost to those nearing retirement age.
Employer Contribution Limits
Employer contribution limits are a crucial aspect of retirement planning. For 401(k)s, the maximum employer contribution limit is $66,000, including your personal deferrals.
It’s important to note that this limit applies per employer. Therefore, if you have multiple jobs with separate 401(k) plans, each employer can contribute up to this limit.
The separate limit per employer offers a significant opportunity for individuals with multiple income sources. It allows you to potentially accumulate larger retirement savings at a faster rate.
However, always be mindful that the total contributions (employee plus employer) should not exceed the set limit for each job.
The Impact of Controlled Group Rules on Your Retirement Plans
Controlled group rules can significantly impact your retirement plans, especially if you own multiple businesses or are part of interconnected companies.
These rules are designed by the IRS to prevent business owners from sidestepping retirement plan contribution limits by spreading businesses across various entities.
A controlled group is formed when businesses are connected through ownership. There are two main types: parent-subsidiary and brother-sister groups.
In such cases, the IRS considers all employees of the controlled group as one entity for retirement plan purposes. This means that the contribution limits apply across all businesses within the group.
How to Set Up a Retirement Account?
Setting up a retirement account is a crucial step in securing your financial future. The process varies slightly depending on the type of account you choose.
For employer-sponsored plans like 401(k)s, enrollment typically happens through your employer. You’ll need to decide your contribution amount and investment choices.
For individual plans like IRAs, you’ll need to open an account with a brokerage firm, bank, or financial institution. The process involves filling out an application, choosing your investments, and setting up funding for the account.
If you’re self-employed or have a side business, you can opt for SEP IRAs or Solo 401(k)s, which can be set up through most financial institutions that offer retirement accounts.
Regardless of the type of account, it’s important to regularly review and adjust your contributions and investment choices based on your financial situation and retirement goals.
| Retirement Account Type | Steps for Setup |
|---|---|
| Employer-Sponsored 401(k) |
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| Individual Retirement Accounts (IRAs) |
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| SEP IRAs/Solo 401(k) for Self-Employed |
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How to Choose the Right Retirement Plan for Your Income Mix?
Choosing the right retirement plan for your income mix requires a careful assessment of your financial situation, employment status, and long-term goals. If you have a traditional job and a side business, you have multiple options.
401(k) through your employer is a standard choice, and if you’re self-employed, a Solo 401(k) or SEP IRA might be more suitable. Consider factors like contribution limits, tax benefits, and investment options.
Solo 401(k) is ideal if you want to maximize contributions, as it allows for both employer and employee contributions. A SEP IRA, on the other hand, is simpler to manage and offers flexibility in contributions.
A very popular solution for investing is the stock market. However, it requires constant tracking and analysis. Another important thing is to learn What Happens to Stock Options After a Company Is Acquired.
Tips to Stay Within IRS Limits
Staying within IRS limits for retirement contributions is crucial to avoid penalties and maximize your retirement savings efficiently.
Exceeding them can result in tax penalties, so it’s important to be aware of the current limits and how they apply to your situation, especially if you have multiple income sources or retirement accounts.
- Know the Annual Contribution Limits: Each year, the IRS sets limits for different retirement accounts. For instance, the 401(k) contribution limit is $22,500 for individuals under 50, and $30,000 for those 50 or older. IRAs have a lower limit. Keep these limits in mind as you plan your contributions.
- Track Contributions Across Multiple Jobs: If you have more than one job offering a retirement plan, track your contributions to ensure the total doesn’t exceed the annual limit. Remember, the limit is cumulative across all 401(k) plans you’re contributing to.
- Consider Employer Contributions: Understand that employer contributions count towards the overall limit in plans like a 401(k). While you can control your contributions, keep tabs on what your employer contributes to avoid exceeding the limit.
- Be Cautious with Catch-Up Contributions: If you’re over 50, you’re eligible for catch-up contributions. However, ensure that these additional contributions don’t push you over the combined limit for your age group.
- Monitor Changes in IRS Limits: The IRS occasionally adjusts contribution limits to account for inflation. Stay informed about these changes, as they can affect your contribution strategy.
- Understand Controlled Group Rules: If you own multiple businesses, be aware of controlled group rules. These rules could limit the total amount you can contribute if the businesses are related.
- Regularly Review Your Contributions: Make it a habit to review your contributions at least annually. This practice is especially important if your income changes or you switch jobs.
- Consult a Financial Advisor: If you’re unsure or your situation is complex, consulting with a financial advisor can provide clarity and help you navigate the intricacies of retirement contributions.
FAQs
Is it better to have all money in one retirement account?
There are pros and cons of having all your money in one retirement account. Having one account can make it easier to manage your savings and investments, but it can also limit your options and expose you to more risk in case of fraud or bankruptcy.
Can I retire at 55 with $1 million?
It may be possible to retire at 55 with $1 million, depending on your lifestyle and expenses. You will need to plan for a long retirement, find a way to cover your health insurance costs, and withdraw your savings wisely to avoid taxes and penalties.
What is the 5 year rule for retirement?
The 5 year rule for retirement applies to Roth IRAs, which are funded with after-tax money. It means that you have to wait at least 5 years after your first contribution or conversion to a Roth IRA before you can withdraw your earnings tax-free and penalty-free.
What is 45% retirement rule?
The 45% retirement rule is a guideline from Fidelity that suggests your retirement savings should generate about 45% of your pre-tax, pre-retirement income each year. The rest of your income would come from Social Security and other sources. This rule can help you estimate how much you need to save for retirement.
Last Words
Navigating the world of retirement contributions can be like trying to solve a complex puzzle, especially when you’re balancing more than one job or running a side business. The key is to stay informed about IRS limits and rules, and to keep a close eye on your contributions throughout the year.