How much can you contribute to 401k as self-employed?

In this be free and wealth post, you will learn :

  • How much can you contribute in a solo 401k if you already have an employer 401k
  • Why consider a SEP-IRA
  • Contributions limits for SEP-IRA

I have a 401k through my employer. Then I do contracting and run a business on the side, where I also make a significant amount. Let's look how much I can contribute to retirement with this extra money.

Employer salary : 150000$
Employer 401k : Max out Roth 401k (18000$).
self-employed earnings (after all expenses): 50000$

First off, you can contribute more than 18000$ per year in all your 401k. Therefore the self-employed earnings can't be used to contribute to a solo-401k.

Second rule: Sum of all contributions can't exceed 53000$ for 2016. This includes all 401k (traditional, Roth 401k, After-tax), employer match, etc...), SEP-IRA, IRA. But in this case since you are both employed and self-employed, the contributions are treated separately. Therefore it means you can contribute up to 53000$ with your employer plan (for example 18000$ elective deferral with employer match of 5000$ with an after-401k of 30000$). And on top of it, you can still make your SEP-IRA contributions with your business.

SEP-IRA contribution limits.

Now let's figure the contribution limits a self-employed individual with an existing full-time work. Let's take a hypothetical case where your side business generates 200000$ of net profit and you want to contribute the maximum (25%).[^4] You can juste the contribution rate (25% in this case) and multiply by your net profit. You need to follow the following formula [^3]:

$$ contribution amount = (netprofit - SEtax)({contribution rate\over 100+contribution rate}) $$

net profit$200,000
self employment tax (SE Tax)$2,678
Net profit -1/2 (SE tax)$197,322
Contribution rate25.00%
Contribution rate (10/110)20.0000%
Allowed contributions$39,464

You are fine as long as you are within the limit of 53000$ defined by IRS maximum contribution per plan.
This contribution can be into a SEP-IRA. Note that is also possible to convert this SEP-IRA into a Roth IRA but you will have to pay taxes on it.