Making Contributions to Both a 457(b) Government Plan and a Solo 401k

QUESTION:

I am a police officer currently enrolled in a 457b plan and maxed out at $36k with the catch up. I make about $106k gross, before deductions. I also contribute the annual $5500 allowance to an IRA.

I have been doing side jobs for years and file a Schedule C for the 1099's I get from various contractors. This tax year I have made $9k profit and I will make another $3k profit by March, in the 2017 tax year.

I am exploring opening a solo 401k to direct all of my 1099 profits - which, I think I'm okay?

ANSWER:

Yes, the rules allow for contributions to multiple plans such as a solo 401k plan and a 457b plan.

Further, while employee contributions are generally aggregated between all qualified plans such as a solo 401k plan and a full-time employer 401k plan, the 457b is special in that the employee contribution aggregation rules do not apply.

As such because you are self-employee, you can participate in a solo 401k plan. You can also continue participating in your 457b governmental plan. This will result in supercharging your retirement savings because you can do salary deferral of $18,000 to your 457b for 2016. You can also contribute another $18,000 in employee contributions to the solo 401k if you generate enough net self-employment income from your self-employed business.

If you are 50 or older by the end of the year, you may defer up to an additional $12,000 in catch-up contributions, with no more than $6,000 being made to the 457(b) plan and $6,000 to the solo 401k plan.

QUESTION:

The bigger question though is I am set to retire in July of 2017. Can I open a solo 401K for the 2016 and 2017 10-99 income to shelter that and then direct rollover into my 457b plan before I retire (say, June of 2017). If so, do I have to "terminate" the solo 401k first or can I direct roll-over at anytime? I would like to keep the solo 401k open for potential future use but I really want that extra 401k money in the 457 before I retire.

ANSWER:

While the solo 401k rules allow for transfers to other qualified plans, you will need to check with your 457b administrator to see if the 457b will allow for incoming transfers from a defined contribution plan such as a solo 401k plan. Also, generally employee contributions made to a solo 401k plan cannot be transferred-out unless you are age 59 ½ or older, or are no longer employed; however, because you are over age 59 1/2, you meet one of the triggering events and can thus process partial or full transfers from the solo 401k plan.

Lastly, when calculating your annual solo 401k contribution, make sure to plug in the net-income figure in our solo 401k contribution calculator as you don’t want to contribute more than you are allowed which would result in an over contribution.

To learn more about the solo 401k rules, VISIT HERE.