401k and benefits while moonlighting multiple jobs

Maximizing 401Ks And Benefits While Moonlighting Multiple Jobs

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:

  1. More commonly known is $19,500 employee tax-deferred contribution limit for 2021
  2. 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 contribtuion. Yeah, ‘Murica! I’m being a little cheeky but you get the point. In the US, it rules are such 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.

Key Takeways

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.

References

  1. https://www.whitecoatinvestor.com/multiple-401k-rules/
  2. https://windgatewealth.com/two-for-the-money-can-i-contribute-to-two-retirement-plans-if-i-work-two-jobs/
  3. https://wealthymommd.com/the-solo-401k/
  4. https://www.cerebraltaxadvisors.com/blog/multiple-401k-accounts/
  5. https://www.levels.fyi/benefits/

18 comments

  1. I have a question specifically about the 19,500 personal contribution that you’ve mentioned should be “counted” toward toward the 58k maximum over each and every plan — this seems to contradict the IRS’s example on their website: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

    From about 2/3rds down that page —

    “Example 1: In 2020, Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business and sets up a solo 401(k). Greg contributes the maximum amount to his employer’s 401(k) plan for 2020, $19,500. He would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,500. He would also like to contribute the maximum amount to his solo 401(k) plan.

    Greg is not able to make further elective salary deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,500, to his employer’s plan. However, he has enough earned income from his business to contribute the overall maximum for the year, $57,000. Greg can make a nonelective contribution of $57,000 to his solo 401(k) plan. This $57,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately.”

    How is it that Greg would still be able to make a $57,000 nonelective contribution, if he’s already contributed his personal maximum $19,500 to the employer plan?

    This seems to contradict what you’ve said here in the comments, that the $19,500 would be subtracted from each separate plan regardless of where that contribution was made.

    Does that make sense? It seems like even if you’ve contributed the personal maximum of $19,500 in another plan, that you’d still have the full 58k (2021 limit) to contribute as a nonelective employer contribution in that second plan.

    Any thoughts?

    1. Hey thanks for looking into that and give an example from IRS. After further review, you’re correct — I might have misread a different example from IRS.

      What I meant to say is if you used up all your elective deferral with J1, then you can’t make any contribution to J2 and capture J2’s 401K match.

      For solo 401K, as long as you make non-elective contribution (aka as the employer), you can pretty much max as much as your net profit could enable.

      Thanks again for bringing this to my attention.

  2. There’s one problem I was really hoping this touched upon but didn’t see.

    What do you do in the case that employer 1 see’s the extra contribution to your 401k. I’m not sure what legal bounds there is to this, but I’ve seen stories from people making bank with personal brokerage accounts with their 401k (basically you can choose your own stocks) and then the employer hr approaches you about it.

    1. If you over-contributed that’s not an HR problem. It’s a tax problem you created for yourself, and it’s between you and the 401K administrator/brokerage.

  3. Sort of unrelated but what about health insurance. I’m currently being laid off in October with an extra month of health insurance for my family and I through November. But I start a new job next week and they say I need to take their health insurance. That means 3 or so months of complete primary insurance overlap. Do I just not tell any of my providers about this new insurance? Is there a chance either employer will find out about the other via my health insurance? (Two different insurance companies).

  4. Hey Isaac, the whitecoat investor article you linked seems to contradict what you’re saying here. I don’t seem to be able to message you on discord anymore. Are you still message able?

    1. Hi Jobman — feel free to email me and we can discuss. I’m like 99.9% sure of what I wrote but never hurts to pressure test it with you.

  5. Hey nice new article. I don’t get the rule 2 though. Shouldn’t it be 58,000 per unrelated employer and just include the 19.5k? You could contribute 19.5k at one employer and get 38,500 from the employer. Then 58k from N other employers?

    1. Thanks for checking in Jobman. Not a surprise you’d be the first to comment 🙂 So think of Rule #2 as only applicable to the employer portion of the overall contribution limit. It’s different from Rule #1 in that it isn’t “universal.” You can have five unrelated employers and if each matches your contribution you can then spread your $19.5K amongst them all to capture the most dollars in the employer matching. The cap for each employer contribution is basically $58,000 (overall limit) minus $19,500 (employee limit) which equals $38,500 per employer! REMEMBER once you’ve max your employee contribution it’s universally counted across all employers. Hence why the $58K – $19.5K = $38.5K limit per unrelated employer.

      Now imagine the case where an employer makes matching contributions without you having to make any employee contribution. For example, imagine when you’re one of the partners in a medical practice! Or a self-employed contractor who contributes 20% of her net earnings to her own solo 401K as “the employer.” Oh how generous, thank you IRS!

    2. Hi Isaac P. My point is that because the employee portion applies globally, you should be able to end up with 58k at each employer technically. Consider three jobs. One is a solo 401k that you can put 58k in. Another is a job that offers mega backdoor Roth so you can contribute 58k there. And a third job just randomly is nice and decides to “match” 58k without you having to put anything in. There’s no 38.5k limit applicable anywhere here. Also, consider this. If you contribute just 8k to one job’s 401k, your employer isn’t limited to 38.5k match. They can match 50k.

    3. Hi Jobman – I think we’re both saying the same thing but in different ways. Let me be clear in my assumption — which is everyone maxes out their employee contribution at $19.5K cumulatively, across multiple employers. In that case, because that employee contribution portion is universal, it gets counted as $19.5K at each of the employers towards the max total of $58K (split amongst employee and employer contributions). Does that make sense?

      So theoretically, if you max your employee part of the total 401K contribution limit, then because of its universal nature, each employer essentially can only contribute the max of $38.5K on their employer matching portion, totally $58K at each employer — most won’t hit this scenario unless you’re an owner or partner in one of the employers and has a say in how much the employer contribution should be. So our discussion is likely a moot point. Hope this helps!

    4. In other words, 19.5k is the global employee contribution limit. 58k is the per-employer total contribution limit. 38.5k is only relevant if you only have one employer.

    5. Nope. Drilling down more, as usual 🙂 You’re right on part 1. For part 2, that $19.5K gets counted as well at employer #2 even though you made that employee contribution at employer #1’s 401K. Same applies to your own solo 401K. Thus, the $38.5K delta is a real limit for each unrelated employer contribution. Don’t ask me why…I just play by the rules of the IRS.

    6. Interesting. So you’re saying the 19.5k counts against the 58k at each employer even if you only contributed at one? That seems really confusing.

    7. Go tell your Congressman! I call it accountant math lol. Same for the self-employment tax and deduction allowed for the employer section. Go figure. Antiquated ways of thinking left over from the industrial revolution 1.0.

    8. Well that’s a little disappointing. My big plans for my 401(k)s just got a bit more modest 😂. I guess I’ll have to discuss this with my financial planner.

    9. That’s a little disappointing. My ambitious 401(k) plans just got a bit more modest 😂. This brings up an interesting point. If you have two or three jobs that offer “after tax” 401(k) offerings, I wonder if it makes some sense to max out 58k at each without making any employee contributions. You lose out on the opportunity to deduct nearly 20k of income, but maybe it’s worth it in order to be able to contribute 19.5k * N jobs to 401(k)s. Especially if they offer in plan Roth conversions.

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