Beating The $52k Solo K Limit For Investors With Multiple Businesses

33 Replies

I am writing about this on BP because I just found out about it and there are bound to be some tax wizards on here that know about about the game theory needed to navigate our ridiculous tax code.  I stumbled upon this article in my online research:

Beating the $51K Limit – Friday Q&A Series

Note that the upper threshold has increased to $52k since this article was written.  

It seems like if you have multiple businesses or streams of income and can declare the right portions as earned income you can exceed the $52k threshold that would normally be imposed by I.R.C Section 415(c) which is linked here for convenience:

I.R.C Section 415(c)

Once you "use up" the $17.5k for a 401(k) you seem to be able to shelter up to 18% of the profit afterwards.  I am not really following his example so I was hoping someone could explain it to me in English ;-)

There are multiple items to navigate with all of this aside from this abstruse piece of the regulations, but clarity on this piece in isolation would be helpful if one of our tax wizards can help with a common sense example.  If you're not a tax wizard please feel free to comment as well since this should be quite interesting for some of the high income earners on BP looking to keep more of their hard-earned money.  

Great topic Bryan,

I'm no tax expert, but here is my take on it.

In his scenario he has 2 jobs, each have different ownership  (very important to meet this requirement).

Job (A) He is a minority partner & does not control this entity.  For that year he elected to have his entire contribution to the 401k come from his employer or $51k into 401k Plan (A).

Job (B) His own company that he has sole control of & is unrelated.  He can open a SOLO 401k & contribute as an employee, of Company B,  up to $17,500 total for all plans whether you have 2 plans on 10 plans. 

Additionally,  Employer of Job (B) (which is himself as an owner)  can make an employer contribution of up to $51k as long as it is no more than a maximum 18% of net adjusted business profit or compensation.

There is no restriction to how many jobs you can have. This works well if you still have a full-time job somewhere & moonlight doing another business.

 The tricky part is that each "employer entity"must not be owned or controlled by the same person or group. In my opinion, this makes it unwieldy & difficult to implement past a certain point.

Between 2005-2008 I had the opportunity to support & update several old (DOS s/ware) Medical billing systems for several physicians who were friends of my wife & who also used the same system.

One owned several car wash facilities along with 3 small office buildings & his income stream was rather remarkable. He always told my wife he makes more from real estate than medicine.

Another opened two separate locations as skin care spa's. Each building/operation was a separate entity from his regular practice. The large majority of treatments were elective vs HMO fee based & the cash-flow from the spa's was significantly higher than any reimbursement he realized from his general practice.

I am sure this 401(k) option is also a consideration in the increasing number of ambulatory surgical centers we are seeing locally (all separate entities) that are owned by the wives of groups of physicians. 

Our Vet & I have several lively discussions each year about the commercial properties he is accumulating & the large tax deductions he appreciates from them which includes the generous 401(k) deduction option discussed.

However, we have found that separate entities without full time employees is the way to go. This avoids having to meet the required matching of contributions to the employees respective retirement plans.

@Ellis San Jose  

Thanks for helping.  I followed the two separate jobs thing.  What I didn't follow was the math he used in his example.  If he was "working" in one business and taking earned income he can max out his $17.5k either as a Roth 401(k) or Traditional 401(k).  Fine...get that part.

For the business he owns he can then bury additional money.  My understanding was that this was capped at $52k through the Solo K provided it didn't exceed 18% of the profits generated.  So he'd have to make $288.9k (rounded) to "fill up" this bucket by using exactly 18% of the profits as earned income.  

Accurate?  I didn't think he could take another $17.5k for the business he owns because that was capped across all plans in a given year.  

I didn't go study the I.R.C. regs again and this is not really my strength.  If anyone can explain it with a simple example it would be very helpful.  

That's helpful Pat, but they're assuming that the salary is derived from the same line of business.  The real question is if the $52k is a cap for contributions in total for the individual or for the business activity.  The way I understand the articles above and the I.R.C. regulations is that it is a limit for the business and not the individual, but that may not be accurate.  So in other words, if you have two COMPLETELY separate types of businesses and are an employee in one and an "owner" in the other is the $17.5k bucket separate from the $52k bucket?  Or, is the $52k bucket absolute for that individual for the year?

I have also read different forcing functions like 18% in the article and 25% in other articles.  I think the 18% is of profits from that business and 25% is of ALL of something.  It may be earned income and may be AGI or MAGI.  

Hopefully we have some experts that will set us straight soon ;-)  Any takers?

Yes the cap is per individual regardless of the entities involved, hence the spousal advantage to inflate it to $104,000 o/all.

@Bryan Hancock  

Now if it's income taxes on a 'substantial income' that you are attempting to avoid/defer by incorporating the high 401(k) contribution strategy, you may want to consider putting a large portion of your 'income' into a deferred-compensation plan.

I love these strategies .....

Good luck 

@Bryan Hancock

The $17.5k deferral is per person, but the company max is for the company.

@Ellis San Jose is on the right track.

You couldn't contribute to the 401K at (your business #1) plus (your business #2) beyond the $52K total because you have to treat all companies you control as one. What that really means is even though you have multiple businesses, 'you' are the employer now matter how many hats you wear.

When would this work?

If you hold a second job as an employee, the company (say Disney) could technically contribute their 'employer' portion to the 401k. 

This doesn't apply to hardly anyone. 

@Pat L. is on to good logic by looking at other plan options beyond 401k. I don't deal with them personally but I believe Defined Benefit [Section 415(b)1(A)] contribution limits are $210,000 in 2014. 


@Loren Whitney 

For grins, can we walk through a scenario for the person that:

1.  Works at Disney and makes $100k/year in earned income

2.  Has real estate businesses and makes a substantial amount ($750k or so) through their business

I know this is a bit of a corner case, but for grins how would that scenario work?  What would be the:

3.  401(k) cap

4.  Solo K cap


I'm getting ready to head out of town and don't have time to work the specific math today but I'm sure someone else can chime in the figures.

Big picture (contribution limit wise):

Disney 401(k) would be $52,000 based on employer contributions. 

Solo(k) would be $52,000 as well. Counting the employee deferrals.

Thanks Loren.  So if Disney capped the contributions at $17.5k the big picture would be:

-Disney == $17.5k

-Solo K == $52k

Correct?  If so, can you point to the I.R.C. section (above?) that explains this?

I can't get the @ feature to work on this machine so if someone could @ Loren please do so.

@Bryan Hancock

 I believe I.R.C. 402 (g) addresses employee elective deferral limits.


What I am really trying to follow is the strict I.R.C. regulation relating to what happens in the example above.  $17.5k cap for the 401(k) as an employee and a SEPARATE $52k as a business owner for the "side business" in the example above.  $17.5k for Disney and $52k as a real estate business owner.  

Can someone connect those I.R.C. dots and go through an example citing regulations about how the math works?  

a very interesting post. After reading it however I realize that if this is something that you want to do you need to make sure you have a very well versed accountant or tax attorney to help you to put it together properly. It does appear to be worth the effort though.

I know my way around taxes but am not an accountant. I encountered this scenario personally a few years ago. I read and decided the 52k limit as an absolute limit per person, irrespective of # of companies or company ownership.

If you think about it, it makes sense. If the IRS allowed you to deduct 52k per business, wouldn't everyone who wanted to deduct more just form series LLCs or multiple subsidiaries, and pay themselves accordingly?

Equally important, since the non-compliance penalties are ridiculously harsh, it tends to drive you towards absolute avoidance of compliance risk. And also since the numbers are provided to the IRS annually on your W2, there is no chance that the IRS would miss the data (eg: its not like you're playing against the 1% audit risk, there's 100% certainty of the computer seeing and interpretting the data)

That said, I think the root of your question is: "if I make enough money, can I shelter more than the max" and the answer is: "of course you can, you just do it in different ways."

Common methods to defer more income:
- employ your children or spouse. Note there are no social security/medicare taxes due on household employees, and they are ALSO entitled to 17.5k in individual contribution PLUS the company benefit.
- 401ks are defined contribution plans. You can also setup a defined benefit plan (eg: pension) and contribution limits are correlated to how much pension you grant yourself and your employees.
- change your business structure and earn dividends instead of salary income
- purchase life insurance
- shelter income through harvestable losses (eg: real estate or other investments that provide for accelerated depreciation)
- use traditional IRAs... either non-deductible versions or back-door conversions to ROTH iRAs.

Is there the added complication that you are attached to a 401k because you're using the money in your 401k to self-fund the business?


PS -- here's a link:

The key phrase: "The rules regarding contribution limits for multiple plans for multiple businesses are different if the businesses have a common ownership or affiliation"

The defined benefit plan has higher contribution limits. However it is more expensive to setup.

Thanks for all of the helpful ancillary information folks, but this thread is really for determining the rules here.  I have spoken to some tax folks about this, but the rules are not very clear from what I have seen thus far.  Some good points were brought up about compliance risk above, but this isn't really risky if the rules are written down.  It doesn't seem like they are though.

I wanted to bump this thread to see if there are any tax wizards helping folks plan for the new year that may want to chime in.  

For future readers of this thread I found the following articles, one of which is linked previously in this post:


Common Questions About Retirement Plans

If you combine the articles it still seems to imply that things are additive provided that there are not common owners in the business.  So in the case that someone has a W2 AND a well-paying side business it would seem they could bury the $17.5k (or higher if their employer allows for higher contributions) AND up to $52k in their SoloK for their business.

Agree?  Disagree?  I thought with tax time looming in October some folks may have some more feedback here; especially with the peak tax season now over.  What sayeth you tax wizards?

After a lot of research I found the answer to this.  Ironically it was actually on the IRS website:,-Employee/Retirement-Topics-401k-and-Profit-Sharing-Plan-Contribution-Limits

The annual additions paid to a participant's account cannot exceed the lesser of:

1. 100% of the participant's compensation, or

2. $52,000 ($57,500 including catch-up contributions) for 2014 ($53,000, or $59,000 including catch-up contributions for 2015).

There are separate, smaller limits for SIMPLE 401(k) plans.

Example 1: Greg, 46, is employed by an employer with a 401(k) plan and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer

Ellis San Jose nailed it. We have a good number of clients that max it out their day-time job employee contribution and they also max out their self-employed business profit sharing contribution. 

@Dmitriy Fomichenko


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