Level 6

After-tax Roth 401K contribution limit

Forum|Forum|2 years ago
May 6, 2024
2 replies
38 views

Hi, is there a limit to contributing after-tax 401K when switching employers? Client maxed out on previous employer with the pre-tax 401K and made after-tax contributions on top of that. Now switched employers and is asking if they can make additional after-tax contributions?

Thanks!

Tax Talk

qbteachmt

Level 15

Everything has a limit. Your employee might need to do some corrective distributions, because these are for the person, not the employer. You can't max out at multiple employers; the Employee either has or has not maxed out.

Did you search the web or the IRS for the information for the tax year in question and for this taxpayer's age, and the details (such as, more than one account or plan is being contributed into)? You have to look it up, to know what applies.

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P

ptax255Author

Level 6

I looked it up and it seems to me that the limit for after-tax Roth is per employer, not per person. So wanted to confirm if others interpretations is the same as mine.

"Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. "

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.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

qbteachmt

Level 15

Greg is not a good example for what you asked. You asked about someone who has two employers and will be paid via payroll (and W2). Relationship matters: "Now switched employers"

It needs to made clear, when working with these types of benefit topics, that there are plans (employer established), and there are accounts (individual owned), and there are the people with a relationship as employer and/or employee. That and/or is important. The type of plan/account matters, as well, because, for instance, a SIMPLE IRA and a 401(k) stand separately; but, a 401(k) and a Solo 401(k) are both 401(k) and are not separated. A SIMPLE IRA and having a traditional or Roth IRA also are not separated, for instance, you see that on a 1099-R or Form 8606.

If your taxpayer that has 1099-NEC earned income and files Sched C and establishes a SEP-IRA (which is an account) or a Solo 401(k) (which is a plan, that provides for an account), there are different provisions. Under these conditions there is both an employer and an employee, even if that is the same person. But that means there are those separate provisions, depending on which hat your taxpayer is wearing at any point in the discussion.

Greg cannot make more contributions to the Solo 401(k) plan as the person earning the income, if Greg already maxed out employee contribution to a employer's 401(k) plan. However, Greg's Sched C "employer" (company) named Greg can still provide the employer share to the Solo 401(k). Watch the terminology:

"elective salary deferrals" means from the earned income the employee or the person "treated as employee" even though Greg as Sched C "owner/employee" doesn't earn a Salary.

"nonelective contribution" means from the employer company or the person "treated as the employer whose own company would be employing the person doing the work, if there was an employer/employee relationship provided for."

I found an article that might be more applicable:

https://www.cerebraltaxadvisors.com/blog/multiple-401k-accounts/

Hope that helps.

Don't yell at us; we're volunteers

sjrcpa

Level 15

Each person gets one 401(k) deferral limit per year - no matter how many employers they have; and whether pretax or Roth deferrals.

The more I know the more I don’t know.

P

ptax255Author

Level 6

Per the IRS website, the total contributions (not the elective deferrals) are per employer plan.

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.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sha...

sjrcpa

Level 15

You already posted that and were told it does not apply to your situation.

The more I know the more I don’t know.

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