Any retirement option for ineligible partner?

[redsox2004]

Partnership offers a 401(k) plan but eligibility is restricted to people who have been with the firm more than a year.

New partner is receiving $150K in guaranteed payments in this, his first year with the firm, wants to put as much as he can into a retirement plan for this year.

I'm thinking he's out of luck on setting any $$$ aside for retirement, since partners are generally treated as employees and the set-aside would have to be part of the entity's plan offerings. Does he have any options besides IRA/Roth accounts?

[erchess]

I think you're right

that he's out of luck until he is eligible for the firm's retirement plan.

[JohnH]

He can do a SEP IRA for up to 25% of his self-employmen income.

[erchess]

Sep Ira

I thought the firm had to set that up for him since he is not the sole owner. Glad you posted - I learned something so my day wasn't wasted.

[redsox2004]

Hi John--

He can still contribute to a SEP-IRA even though the contribution isn't being run through the partnership? Wasn't aware that was o.k. Is the reason it's allowed in this case because he's not yet eligible to be included in the partnership's plan?

--Joe

[Davc]

Disagree with John. A partner is considered an employee of the partnership for this purpose and cannot set up their own plan. They also must meet the same eligibility requirements as the regular employees to participate.

[JohnH]

Looks like I'm the one with something to learn today. I believed partners could put money into a SEP outside the partnership, but it looks like the SEP payments must flow to their return via the K-1. Sorry Joe & Edwin - bad advice from me.

[erchess]

We all make mistakes

The trick is to make most of them here rather than on tax returns.

Now I have a question. I am a sole prop. Can I set up a Sep Ira and stick 25% of my profits in it and if so can I still put an additional amount in my IRA? I understand that depending on my income the IRA contribution might not be deductible but hey I could maybe go Roth or just have basis in my IRA.

[redsox2004]

Looks like I'm the one with something to learn today. I believed partners could put money into a SEP outside the partnership, but it looks like the SEP payments must flow to their return via the K-1. Sorry Joe & Edwin - bad advice from me.

Totally OK, John--I had to get my head around the reason for the problem, which is that the SEP is an employer plan, not an employee plan, which is why the partner doesn't have the option of going off and doing it on his own. Wouldn't have gotten to that answer without The Wisdom Of The Board.

--Joe

[redsox2004]

"Erchess,"--

You can contribute to an IRA as well as to the SEP (by the way, the requirement that net SE earnings be reduced by half of SE tax and the SEP contribution before applying the contribution rate effectively means that the maximum SEP contribution for a sole prop is actually 20% of net, not 25%), but your ability to contribute to a deductible IRA is subject to the same income limitations as encountered by a wage-earner, because having the SEP means that you are eligible for an employer-provided retirement plan.

--Joe