Market Overview

Are you leaving $66k in retirement savings on the table this year?

If you have two flows of active income – say, your working salary plus a side business – you might not be taking advantage of a valuable source of tax-advantaged retirement savings.

The Internal Revenue Code has a provision – Section 415 – that sets a limit on how much you can contribute annually to a qualified retirement plan. Currently, that’s $22,500 out of your own earned income, plus another $43,500 that your employer can kick in, for a total of $66,000 per year. That’s the maximum you can contribute to any one retirement plan for 2023.

The good news is, you can have more than one retirement plan.

This is particularly good news for pilots, who are capped at 1,000 hours of flying time per year. Compare that with the average American who works 1,892 hours per year, and you have an elite group of people making a six-digit living yet still likely having “billable” time to spare.

So, as long as the income you’re pursuing with your downtime is through a business unrelated to your normal job, you can open and contribute to a new account and put up to $22,500 into it as an employee this year. And, if you’re a sole proprietor or independent contractor, you can kick in up to another $43,500 as the employer.

These figures, by the way, go up every year. The Internal Revenue Service hasn’t yet published the 2024 limits yet, but the National Association of Plan Advisors estimates that the current $66,000 ceiling will rise to $68,000. And all this is before catch-up contributions that employees over age 50 can kick in. It’s set at an additional $7,500 for this year, and NAPA doesn’t expect that to rise for 2024.

Will it ever be enough?

Retirement planning is hard.

That’s why most people haven’t saved enough for their post-work life. A quarter of Americans have no retirement savings at all; fortunately, if you’re reading this, we can presume you are not part of that 25%. Federal Reserve figures for 2019 – the most recent data available for an article published in July 2023 – suggest that the total retirement savings for a median American household is $65,000. But that’s skewed to the low end, so let’s look at the mean average: $255,125.

While that still sounds close to the bone, you can imagine a situation where you could move to a cheap patch of land in a low-tax state, then live on the returns of that retirement account plus your Social Security checks.  That’s especially true if you’re  relatively young and still have opportunities to sit on that nest egg a little longer.

But here’s the problem: You don’t have as much time as you think. More than 50% of all American workers retire at age 60 or younger. Medicare doesn’t kick in until age 65 in most cases, so you might be more out-of-pocket for medical attention. Suddenly, $255,125 might start looking like chump change. According to a survey reported by CBS News, 401(k) holders believe you need $1.8 million saved before you punch out for the last time.

Considering that the maximum annual 401(k) contribution is $22,500 for 2023 – up from $20,000 in 2022 – you can see why it might be hard to park everything you need into one, employer-sponsored retirement account. And while those over age 50 are allowed to contribute an additional $1,000 per year to their IRAs and $7,500 to their 401k plans via catch-up contributions, that still might not be enough.

Fortunately, you don’t have to.

The payout

One question remains: What kind of qualified plan should you choose for your second income stream? An Individual Retirement Account? A Self-Employed IRA? A 401(k)? A defined contribution plan? A profit-sharing plan? For the sake of doubling your Section 415-limited contribution, it doesn’t really make a difference. They all have advantages and disadvantages, which can be very subtle and often require careful analysis. The size of the business as well as the size of your remuneration from it are two important factors, but not the only ones.

Before selecting a vehicle for your additional retirement savings, it might be best to consult a trusted financial advisor.