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I have a 401(k), but I also provide consulting services on the side. Can I establish a retirement plan for my consulting business? If so, how are contributions to the plan affected by my participation in my employer’s retirement plan?


You certainly can set up a retirement plan for your business. As for the connection between that plan and the one you have already, it depends. Let’s assume that your consultancy is unincorporated and has no one other than your spouse working for you. If you’re incorporated and/or have other employees, things get complicated in a hurry. In that case, you may want to see a tax planner who specializes in small businesses. If the simpler set of circumstances applies, then it really doesn’t matter how much you contribute to each of your plans as long as you stay under certain limits for the two plans combined.

There are two sources of contributions to a 401(k): voluntary contributions from the employee, known as elective deferrals, and the ones the employer makes. For 2014 the maximum employer contribution from all sources is $52,000 or your total compensation, whichever is less. Total compensation means the salary from your job plus the net earnings from your business. That’s net, not gross; if you have billings of $55,000 and expenses of $15,000, your net earnings are $40,000. If your salary is $60,000, that would give you total compensation of $100,000 between your job and business. That’s more than $52,000, so the latter figure is the combined amount that can be contributed by your boss at work and by you as the boss of your consultancy. If your other employer kicks in $6,000 to your 401(k) account, for instance, you would be able to contribute all of your $40,000 in net business earnings and remain below the $52,000 ceiling.

You can salt away more for retirement through elective deferrals that you make in your role as an employee at your day job and as an employee of your tough but fair boss at the consulting business. (Remember: In your business, you’re the employer and also an employee.) The combined limit on elective deferrals is the smaller of $17,500 or 25 percent of total compensation. Sticking with our hypothetical figures, you could elect to defer $17,500, as 25 percent of your compensation would exceed that. Whatever the limit is based on your real-world circumstances, if you’re at least 50 years old, you can contribute an additional $5,500; in this example you could defer up to $23,000.

Another consideration is how much of the contributions of either sort you can deduct from your taxes. All of your elective deferrals, from your job and your business, are deductible. As for the employer contributions, the only ones that concern you as far as taxes go are from your consultancy. You can deduct the contributions you make, up to 20 percent of your net business earnings. So if, as above, your net earnings were $40,000, you could deduct $8,000 from your taxes. As stated earlier, you could contribute all of the $40,000, but whether you contribute that much, $8,000 or something in between, only $8,000 would be deductible.

-Conrad de Aenlle