If I have a 457 and 403b plan with my main w2 employer (maxed 403b) should I start a self employed SEP/solo 401k for my side job (income 30k) or just use the 457?

[drnickbelasco]

I am a doctor at a large hospital system and do some medical consulting on the side. I want to reduce my tax burden. I have a 457 that I currently don't use at all and a 403b I maxed out. I want to know if I should bother with a SEP or something for my side consulting or just try to start using the 457 from my main employer

[AliciaP1]

Your elective deferrals are limited by person, not plan.  So, the maximum elective contributions to the 403b plan would include both your W2 job deferrals and any deferrals you make if you create a solo 401k for your side job.  The benefit you could get in addition with a solo 401k would be the employer nonelective deferrals.

Per the IRS:

The owner can contribute:

Employer nonelective contributions up to:

• 25% of compensation as defined by the plan, or
• Contribution limits for self-employed individuals:
  • You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:
    • one-half of your self-employment tax, and
    • contributions for yourself.

See also Calculating Your Own Retirement Plan Contribution.

[drnickbelasco]

Hi Alicia, thank you so much for the response!  In the situation I outlined, is there a meaningful difference in using my employer-provided 457 to offset more of my income vs using the self-employed vehicle as you describe?

[AbrahamT]

Well, the 1st thing to do would be to go through the differences between a solo 401k vs a sep ira for your self employed income. Then compare that to the  employer sponsored 457 plan.

On seps and solo 401k's see HERE https://www.irs.gov/retirement-plans/one-participant-401k-plans

Also HERE https://www.irs.gov/pub/irs-pdf/p560.pdf  

And HERE https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans#:~:text=Plans%20eligible%2... for the 457(b) or 457 in short.

After you go through this information, you will be able to more narrowly focus in on your given situation and proceed from there.

[dmertz]

Of course it too late to add anything to the 457(b) or 403(b) for 2022, so your only option to defer more income would be to contribute to a SEP-IRA or a solo 401(k).  If you already made the maximum annual limit in elective deferrals to to the 403(b), you can't make elective deferrals to a solo 401(k) for 2022 but you can still make an employer contribution from you self-employment income, the same amount that you could contribute to a SEP-IRA (SEP-IRA contributions can only be employer contributions).

For 2023 and beyond, you might find it beneficial to make elective deferrals to the 457(b) because there is no early-distribution penalty for distributions from a 457(b) with respect to funds derived from 457(b) contributions (but not amounts rolled over to a 457(b) from another type of plan).  The elective deferral limit for the 457(b) is separate from the elective deferral limit to other plans combined, so there is no need to worry about that.

If you intend to make elective deferrals to the 403(b) equal to the annual limit in the future, there would be no benefit to having a solo 401(k) over a SEP-IRA since you would not be able to make elective deferrals to the solo 401(k), only the same employer contribution that you could make to a SEP-IRA instead.