One limit, 2 employers?

[Guest Drumsnwhistles]

I am a non-highly compensated employee of a large US corporation and participate in their 401(k) plan. I maximize my contribution each year.

I also have an unrelated video business (just me) and want to establish an "Individual 401(k)". I'm being told that between the two I am limited to $15,000 for 2006 (I'm not old enough for the extra $5,000).

Is that true? I'm asking because I'm getting two different answers -- my employer says no, my accountant says yes.

I want to put $15,000 into each plan.

Thanks for your help!

DnW

[Guest WWPDRC]

Your employer is correct. The 402(g) limit is an individual limit, not a plan limit and cannot exceed $15,000 for PY 2006. However, I think you can adopt a SEP or at least a Profit Sharing Plan for your video business and contribute up to 25% of your compensation as an employer contribution.

[Guest Cheri_Rose]

Technically both are correct.

At a plan level, you can contribute up to the 402g limit for the year ($15k in '06). So up to $15k in both plans.

However, at an individual level, you can only contribute up to the 402g limit, in ALL plans. I think your accountant was trying to save you some headache, in over contributing into the plans and having to request a return of excess distribution from one or both plans.

When you file your 1040 at the end of the year, you can only deduct $15k. If you don't request the return of excess contribution by 4/15 of the year following, you will incur tax penalties (double taxation on the amounts contributed over $15k + attributable earnings).

I agree that the best way to maximize your options is to adopt a profit sharing plan and contributing to that as the employer. That way you can contribute up to the 25% or section 415 limit ($44k in '06).

[Guest Drumsnwhistles]

Thanks so much for your replies! I'll definitely look at the Profit Sharing Option.

DnW

Technically both are correct.

At a plan level, you can contribute up to the 402g limit for the year ($15k in '06). So up to $15k in both plans.

However, at an individual level, you can only contribute up to the 402g limit, in ALL plans. I think your accountant was trying to save you some headache, in over contributing into the plans and having to request a return of excess distribution from one or both plans.

When you file your 1040 at the end of the year, you can only deduct $15k. If you don't request the return of excess contribution by 4/15 of the year following, you will incur tax penalties (double taxation on the amounts contributed over $15k + attributable earnings).

I agree that the best way to maximize your options is to adopt a profit sharing plan and contributing to that as the employer. That way you can contribute up to the 25% or section 415 limit ($44k in '06).

[Belgarath]

Sorry, I had sent a reply without thinking, which I immediately deleted. If anyone saw it, just chalk it up to brain cramp after a hard day...