W-2 & SE Retirement Combined Contributions Limits

[rfk]

I have a client who wants tax planning for maximizing retirement plan contribution limits. In reviewing the example in TheTaxBook, I am thinking of the following:

The situation and assumption: The client is in a 403(b) plan; I presume just over 50, so maximum amount through the employer would be $22,000 for 2009. For maximum calculation purposes, I presume the contribution for a SEP-IRA (in this case) would be $49,000 less what ever was contributed to the 403(b) at the end of the year.

So if $22,000 was allowed for the 403(b) in 2009, then the difference of $49,000 less the $22,000 is the remaining amount that can be added to a SE employed side business retirement deduction. However, I want to know how the 20% of net SE income (blah blah blah) would come into effect regarding the different amount or remaining amount to derive a good number.

Please advise if anyone knows how the formulation works.

Thank you.

rfk

[Zee]

Here's my understanding:

I believe you're confusing an SEP-IRA, with what is sometimes called a "Solo-401-K" or "Uni-401-K". The maximum employee contribution from all such plans (including your client's 403-B) for 2009 can't exceed $22,000 (including the catch-up), and employer contributions to both plans would be capped by the deduction and overall limits - the lesser of 100% of compensation, or $49,000(not including catch-up) for 2009. I don't believe an SEP-IRA has catch-up provisions.

Since Schedule C owner's start with earned income to determine their maximum contribution, it brings the maximum 25% of contribution down to 20% of earned income (Same as an SEP-IRA).

Assuming a person over 50 has W2 compensation of $184,000 from an employer and his sole proprietorship (I know sole proprietors don't have W2 compensation this is for simplicity of the example). Even though for 2009, compensation is limited to $245,000, the Section 415 limit of $49,000 means the maximum plan contribution is achieved with a compensation of $196,000 ($49,000/.25).

At compensation above this amount, the results of a 401-K and SEP are the same for an individual UNDER age 50. There is no difference between the two plans at and above the $196,000 compensation amount. In this example, the contribution is made up of $16,500, plus the $5,500 catch up, and the $49,000 limitation minus the non-catch up amount of $16,500, or $32,500. The total contribution would be $54,500. You'll note that the employer contribution could have been $49,000 ($196,000 x .25) and a catch-up of $5,500 or the same amount.

The key point is the difference is the catch-up. The $49,000 limitation doesn't include the catch-up contribution. So, the maximum is $54,500. If the individual was under age 50, there would be no difference in the maximum allowable. In your case, a 401-K is the better choice.

Wow! That was a long and windy answer to your question.

There are a couple of other points to remember. A solo 401-K must be established before year-end, and the employee deferral must be elected before year-end. The contribution can be made by the due date of the return plus extensions. The election document isn't sent anywhere, but filed by the client But, if you're client is audited without the election document as support signed & dated prior to year-end, the IRS can deny the deduction.

Darn!....I just found a link that explains everything a lot better than me. Here it is:

http://www.smsmallbiz.com/benefits/The_Solo_401(k).html

[rfk]

Thanks Zee

I just wanted to be able to advise my client who is in a 403(b) already at a job (W-2), but also has a side business. So I want to advise her on the maximum contribution, collectively both situations. I was presuming $49,000 for TY 2009.

rfk

[Zee]

I just wanted to be able to advise my client who is in a 403(b) already at a job (W-2), but also has a side business. So I want to advise her on the maximum contribution, collectively both situations. I was presuming $49,000 for TY 2009.

rfk

That's correct...$49,000 unless she's over 50...then, the maximum is $54,500.

[New York Enrolled Agent]

If I understand this thread correctly, then I think I need to disagree.

The elective deferrals under the §403(b) plan are not coordinated with the contributions to the SEP. Elective deferrals are limited and coordinated under all plans that allow for elective deferrals. But I believe the §415 contribution limit is per employer, As long as there is no common ownership issue (it does not appear to be applicable here), then the elective deferral to the 403(b) should have no bearing on the maximum contribution to the SEP.

Rfk writes "I just wanted to be able to advise my client who is in a 403(b) already at a job (W-2), but also has a side business. So I want to advise her on the maximum contribution, collectively both situations. I was presuming $49,000 for TY 2009."

My reading is that you consider $49K to be the combined maximum. My understanding is that your client (50 or over) could fund the §403(b) to a total of $22,000 in elective deferrals and then (assuming sufficient income is generated in the side business) could fund the SEP to an additional maximum of $49,000 for a possible total of $71,000. Others may disagree.