Stacking Retirement Accounts to Maximize Contributions and Tax Savings

For many professionals, side income is a wonderful thing. Working multiple jobs, consulting, or dabbling in entrepreneurship are substantial ways to earn extra income. Unfortunately, that added income also means an increased tax bill and swelling taxable accounts. Stacking retirement accounts is a little-known strategy that will grow your tax-deferred nest egg, while sheltering income from the IRS.

Maximize Pre-Tax and Tax-Deferred Savings

Stacking retirement accounts can be an effective way for individuals to exceed the maximum contribution limits on retirement plans set forth by the IRS.

Currently, contributions made to retirement plans fall into one of two categories: employee contributions and employer contributions. As of 2017, the maximum amount one is able to save between both the employer and employee contributions in any given account is $54,000. The opportunity to maximize pre-tax/tax deferred savings comes from the distinction between employer and employee contributions.

Avoid Employer Limitations by Stacking

Under IRS tax code, employee contributions (elective deferrals) are subject to an individual limit of $18,000, across any retirement plans in which the employee participates. However, maximum contribution limits (IRC 415(c)) are PER employer, not an aggregated total across all retirement plans. This opens up the possibility to use the employer portion across accounts, to exceed the limits imposed by any given plan.

Overall Limit on Contributions

Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:

  • Elective Deferrals
  • Employer Matching Contributions
  • Employer non-elective Contributions
  • Allocations of Forfeitures

While individual circumstances dictate the specifics regarding account stacking, it generally involves participation in a primary retirement account and a secondary account, often a SEP IRA or solo 401(k).  It is the secondary retirement account that is then used to funnel profits from a second, unrelated, job into a tax sheltered account. For the stacking strategy to work, both employers need to be unrelated and not considered under common control as defined by IRS Sec. 414 (c), in which case they would be treated as a single employer nullifying the tax saving strategy.

The ability to stack retirement accounts may differ based on your employment situation. Contact a Claris advisor to see if you can benefit from stacking retirement accounts.

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