Have you ever wondered if you could maximize contributions to more than one 401K while moonlighting multiple jobs? You’re not alone. Years ago, when I landed my first contracting side hustle, I did some research and started a solo 401K (also known as an individual 401K). Since then, I’ve been maxing out multiple 401Ks per the IRS rules and so can you. I’ll focus exclusively on the solo 401K because it provides more flexibility than other self-directed retirement plans like the SEP-IRA. You can read why here.
TLDR – the solo 401K is superior. Additionally, I’ll delve into how you can optimize employer-provided benefits like healthcare and life insurance while doubly employed – perks that are often overlooked when considering taking a second job as a contractor versus an employee.
To make things simple, we’ll assume only pre-tax retirement contributions. It’s better to delay taxes until old age when your tax liability is lower unless, of course, your employers offer the mega backdoor Roth IRA option (aka additional after-tax contributions). More on the mega backdoor Roth IRA in a fast follow-on.
Side note: Overemployed is technically sunlighting since you’re working multiple full-time jobs simultaneously. But hey, whatever.
What You Need To Know About The 401K Rules From The IRS
Here we go again about taxes. Why? That’s because the 401K is an IRS tax exception designed to promote retirement savings. If you mess up your tax-deferred 401K contributions, be prepared for the IRS to come knocking.
Per the IRS, there are two 401K contribution limits:
- More commonly known is $19,500 employee tax-deferred contribution limit for 2021
- Lesser known and often misunderstood is $58,000 overall contributions limit 2021; combined employee and employers contributions. Notice the big difference! It pays to be your own boss and use the employer contribution to top up on your solo 401K, even if you make zero employee contribution. Yeah, ‘Murica! I’m being a little cheeky but you get the point. In the US, rules are such that it pays to have business income, either self-employed or legal tax-entities like a S corp or non-pass through LLC.
Bottom line: if you’ve 1099s or reportable business income, then you can contribute 20% of your net profit to a solo 401K, up to the combined limit of $58,000 for 2021.
Now let’s do some quick math. If you’ve got a net profit of $290,000, then as your own boss you can contribute $58,000 to your solo 401K on the employer portion. But wait, you ask, what about my W2 job where my employer contributed a match to my 401K. Ah-ha! Keep reading. Rule #2 will explain why “over” contributing by each employer is allowed.
Rule #1 – One Universal Employee Contribution Limit
Years ago I was confused by the 401K rules so I called up Vanguard. Here’s what I learned. While you technically can contribute to multiple 401Ks, the employee portion of the contribution limit applies across all 401Ks. In other words, your employee 401K contribution limit is universal and is the sum of all your employee contritions across multiple 401Ks. And don’t think you can game the system. Your employee contributions get reported to the IRS through W2s. Yes, the IRS is omnipotent and knows all! If this sounds familiar to you, it’s probably because you’ve read my top 5 tax surprises. The IRS universally applies the 401K employee contribution limit the same way as it does for the social security income limit across multiple employers.
Review your employers’ 401K matching policies & strategize
Read your employers’ 401K plan carefully since some have made it sound catchy like “50% 401K matching.” If it makes you go “huh, what does that mean?” Go ask your HR or benefits specialists. In reality, employers cap their absolute dollar matching per the IRS salary limit of $290,000 for 2021. For example, if your employer matches up to 4% dollar for dollar, and your salary is $290,000, then your employer contribution maxes out at $11,600, e.g. 4% of $290,000. This assumes you the employee contribute at least $11,600 to get the maximum dollar-for-dollar matching.
In another example, if your employer provides a “50% 401K matching” up to 4% of salary, what this employer meant is they’ll match 50 cents on every dollar of employee contribution, maxing out at $5,800 (50% x 4% x $290,000). Using the previous example, if the employee contributes at least $11,600 to her annual employee contribution, then she’ll capture all her employer’s matching. Notice how a mere play on words (5o%) results in halving the employer contribution – talk about funny HR math and bait and switch.
So what does Rule #1 means for moonlighting multiple jobs
Since the employee contribution limit is universal, you should optimize your employee contribution such that you capture the max of each of your employer’s 401K matching. Thus, if you were 2x-ing with the two above employers, I’d first contribute $11,600 to the one-for-one dollar matching employer and get the full $11,600 match. Next, I’d contribute the remaining $7,900 to the “50% 401K matching” employer and get another $3,950 in employer match. Quite simply, the name of the game is to use your $19,500 employee contribution to capture the most absolute dollar matching you can at the respective employers and your salaries.
WARNING: Since now you’re “gaming” the 401K employer matching, you cannot rely on your respective employers’ payroll to automatically cut you off from over-contributing your 401Ks. Therefore, you need to pay attention to your two buckets of employee contributions and try not to go over the $19,500 limit. Else, you’ll have to withdraw the excess contribution and pay a small penalty. Not a big deal in the greater scheme of things but is a small tax filing headache. The key here is to pay attention to the max dollar matching from each employer for a given dollar of employee contribution up to your annual limit. Forget about all the other mumbo jumbo.
Rule #2 – $58,000 Per Unrelated Employer (could also be your LLC) Contribution Limit
Remember the $58,000 total contribution limit discussed earlier? In the one-job world, the overall limit is typically a mix of employee and employer contributions. But what if own a business, like a contracting LLC, and have set up a solo 401K plan for yourself? The IRS has graciously allowed each unrelated employer to have their own $58,000 limit! Did you hear that? Each employer, such as your own business, can contribute up to $58K, even if the employee doesn’t contribute a dime. That’s crazy money-socking into tax-advantaged accounts.
For example, if your “business” makes $290,000 in net profit, then you can apply 20% of the net profit towards employer contribution in a solo 401K. That’s $58,000 into tax-advantaged investing. I’m oversimplifying, to say the least, so do consult a financial planner or accountant to flesh out your game plan to maximize all your 401Ks, IRAs, etc. (Sidenote: special thanks Jobman#8738 and TA from our community for correcting some mistakes I made earlier).
Here are some good examples of doctors who have figured out how to maximize their 401Ks with Rule #2.
Rule #3 – 50 years old and over? Don’t forget about your catch up contribution (add $6,500 to your employee contribution limit)
This one is pretty basic. If you’re 50 or over, then your employee contribution limit is $26,000 and your new combined employee and employer contribution limit is $64,500.
Other Perks Of Being An Employee Over Contracting When 2x-ing
Why do you think Big Corporates want to use contractors more than to have employees? It’s simple cold, hard business logic. Contractors, even though they’re paid “more” on a per-hour basis, they don’t get benefits. And wow, in Big Tech, these benefits can be in low to mid-five figures in unmeasurable dollars. Check out the estimated benefits dollar amount (not entirely accurate) provided by levels.fyi for some idea on the “unseen” perks of being an employee. I’ll touch on briefly a couple of big benefits most don’t consider when making the contractor versus employee decision.
Unseen benefit #1: Double disability and life insurance
God forbid if something were to happen to you. But if it were, then your loved ones are doubly protected. For example, just looking at your life insurance, which is usually 2x your salary. Now that you’re two salaries, that’s in effect a free double life insurance coverage. Let’s say your salary in Job 1 is $180K and in Job 2 is $220K. Now you’ve got a $800K life insurance, free!
Unseen benefit #2: Potentially double leave of absence, sick days, COVID leave
If COVID didn’t convince you that 2 or even 3x is wise, then imagine an “essential” worker getting sick (man gotta love the corporate euphemism) and having to tough it out without benefits. If you 2x in tech, you’re tremendously privileged. Let’s take a moment and thank those who support our lives by tipping more, using more words of appreciation, and helping those with less to get to where the Overemployed is at.
Having a baby? No worries. Depending on where you live, you may be able to take double maternity or paternity leave, like in Michigan.
Got a case of the Monday and just don’t want to work? Take a double sick day off.
Caught COVID, take two weeks off from both employers. No questions asked.
Oh, got one of those wellness days off? If you’re lucky, maybe both of your employers have the same day off.
Being Overemployed is a wonderful life that comes with hidden benefits like double 401K matching, disability, and life insurances, and paid time off and leave of absences. While some may advocate earning more as a contractor, these hidden benefits should be considered the next time you’re considering being an employee versus a contractor.
Oh, by the way, most employer-provided benefits, like healthcare, are tax-exempt. Another reason why being a double employee has hidden benefits and should be considered in an overall Family Inc. business strategy.