Can I have a solo 401k and a regular 401k?

If you have a day job and you also run a small business on the side, you can have a retirement account at each job. The IRS allows employees and business owners to have multiple retirement accounts as long as there is no affiliated relationship or legal overlap between the two jobs. Also, you must keep watch of the contributions you make to each account since the contributions are calculated per person and not per plan. If you exceed the IRS contribution limit, you could be charged a penalty on the excess contribution.

The IRS allows workers to contribute to multiple retirement accounts if they have more than one job. You can have a traditional 401(k) at your day job, and a Solo 401(k) for your small business. In this case, you can increase your retirement savings while reducing your tax bill for the year. You can contribute up to $58,000 to your Solo 401(k) in 2021, and another $58,000 to the 401(k) account. This would result in a combined contribution of $116,000 for the tax year 2020.

Multiple Retirement Account Rules

Employee Contribution Total

If you have a Solo 401(k) and a regular 401(k), the cumulative employee contributions you make to both accounts should not exceed $19,500 in 2021 ($26,000 if you are 50 or older). You can split the contributions you make to each account, but the total annual contribution should not exceed the allowed IRS limit, regardless of the number of jobs you have.

Employer Contribution per Unrelated Employer

As a self-employed individual, you can contribute as an employer to your Solo 401(k) account. In total, you can contribute up to $58,000 per year, and this total includes the employee contribution, employer's match, and the profit-sharing contribution/employer's contribution. If you have a 401(k) from a second job, the employer can also contribute up to a limit of $58,000. This means you can set aside up to $116,000 each year for both retirement plans.

Catch-up contribution

If you are age 50 or older, the IRS allows you to make additional contributions to the retirement account, in addition to the regular retirement contributions. You can make a catch-up contribution of $6,500 in deductible contributions. This amount is applied to the Solo 401(k) and regular 401(k) collectively, not per plan. If the 401(k) plan does not permit catch-up contributions, you can still make the additional $6,500 catch-up contribution to your Solo 401(k).

Practical Example

Assume that John works at ABC limited, and his maximum allowable employee contribution to his 401(k) is $19,500. His employer also contributes another $38,500, which totals to $58,000. John also earns $300,000 from his consulting business as a solo entrepreneur, and there is no legal relationship between ABC limited and John’s consulting work. If John has a Solo 401(k), he can contribute the lesser of 25% of self-employment income or $58,000. In this case, John can contribute up to $58,000 to his Solo 401(k).  Therefore, John can cumulatively contribute up to $116,000 for the year. If he is age 50 or older, he can use the catch-up contribution once only, hence bringing the total contribution to $122, 500.

Pros of Having a Regular 401(k) and a Solo 401(k)

Accelerate savings

Making contributions to both a traditional 401(k) and a Solo 401(k) allows you to increase the cumulative contributions to almost double. An individual can contribute up to $58,000 in each of the two retirement accounts, hence allowing them to put aside up to $116,000 in 2021. With only one retirement account, you can only save up to $58,000 ($64,000 if you are 50+) in 2021.

More investment options

A Solo 401(k) has diverse investment options that allows investors to invest their money in multiple investments such as stocks, bonds, and other financial instruments. A regular 401(k) has fewer investment options than a Solo 401(k), and having both retirement accounts allows the investor to diversify their investments.

Cons of Having a Regular 401(k) and a Solo 401(k)

Higher fees

Each of the retirement accounts comes with its own set of fees, and you will incur double costs when you maintain the two accounts. For example, you will incur the regular 401(k) fees charged by the 401(k), which could be up to 3% of plan assets. A Solo 401(k) will also incur various fees such as brokerage fees and expense ratios for its investments.

More paperwork

With two retirement accounts, and possibly other old 401(k)s left with former employers, you will have more paperwork to deal with. You will have to keep track of all the accounts to make sure the contributions you make are within the IRS contribution limits. Also, you have to keep track of retirement plan communications to make sure you are up to date on changes made to the plan.