Retirement Plan for S-Corp.

[Gretel]

Wife/husband owned S-Corp. want to sock away as much money as possible into his retirement plan (wife works part time only with relative small salary). He had W-2 wages of $110,000 last year and is over 55. He will retire after 2011, so this plan is basically for one year.

Seems like the options are SEP or 401(k).

I have no experience with the 401(k) but am aware that there is a sole 401(k). The "regular" 401(k) is probably too complicated to set up for this limited use. I have no idea if he would qualify for the solo 401(k). Does anyone know if, since his wife is a non-qualifying employee (part-time), he would qualify for the solo 401(k)?

Any other thoughts? Thanks.

[JohnH]

You said he wants to put "as much money as possible" into the SEP, but I'd ask what exactly that means. Some people say that, but then when the numbers hit the table they reply that they have to keep back some to live on, don't think they can put that much in, etc.

If his current-year salary is the same, then he can put $27,500 into his SEP,. That would be the simplest, quickest, and easiest approach. He could also put 25% of his wife's salary into the SEP as well (which would essentially be the same as putting it into his SEP unless they don't plan to stay married).

If he seriously plans to put more than this into a retirement plan, then he will need to look at a 401(k) / solo 401(k) along with the associated transaction costs and plan limitations.

Another thougt - if the 2010 Form 1120S happens to be on extension, he still has time to make a SEP contribution for himself and his wife for last year if he hasn't already maxed it out for 2010.

[Gretel]

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Another thougt - if the 2010 Form 1120S happens to be on extension, he still has time to make a SEP contribution for himself and his wife for last year if he hasn't already maxed it out for 2010.

Thank you so much, John. Unfortunately the 2010 tax return was filed already when they contacted their financial adviser about this, who in turn then contacted me. As I understood it they meant literally as much as possible. The financial adviser never mentioned the 401(k) only SIMPLE and SEP, mostly probably because he is not too versed himself. I will go talk with him.

[Nashville]

Well Versed Enough

Gretel, you might be right, but it is possible the broker is well versed enough to steer your client away from a 401(k). Essentially it is unlikely that the 401(k) can provide anything that cannot also be provided by a SEP or SIMPLE.

The 401(k) is vestigially employer-driven, even if there is no employer. This means a ton of extra reporting, maybe even a penalty-intensive 5500...

[ChEAr$]

Bear in mind that he does not establish the SEP, (or 401k) , only the corporation may do so. As such it is the corporation which contributes to his IRA which is established by him in conjunction with the corporate's SEP.

[JohnH]

Great clarification Harlan. In looking back at my post, I certainly failed to make it clear that the corp needs to establish the SEP. Thanks for pointing that out.