Tax planning: 401k

[equinecpa]

I have a client who works for a major airline -W2 earnings are usually right at about $150,000. He does not have a retirement plan nor does he currently contribute to company 401k as they do not offer any match.

His wife has an S corporation which has sporadic profits. She does not currently draw a wage and income streams are very irregular. The S corporation has no employees.

Could she set up a 401k within the S corporation and pay herself a low salary say 15K and defer it all or most of it? or better yet pay him a wage (he does participate in the business) and defer it all? The advantage to paying him is he is already maxed out through his regular job on SS wages and would receive his SS contribution back.

I'm thinking if the deferral was made, then the S corp would have net a deduction of 15K (the wages paid), which would flow through to the taxpayer's 1040. The taxpayers would not have any additional income as they would have deffered the whole wage.

What are the holes in this scenario -there must be some! Is there any problem with this if the corporation is not profitable?

Thanks

Carolyn

[JohnH]

The wages paid to him by the S-corp will have a cost associated with them, even though he gets back his half of the SocSec/Med, because the corp will still have to pay the matching 7.65% and it will be lost forever. That's a pretty hefty price to pay, IMO. Plus, there may be workers comp and SUTA expenses to be paid on his salary from the corp. All this is dead cost for no useful purpose.

There's really no match with the S-corp plan, since all the money comes out of their jointly-owned funds anyhow. So any "match" that is being done via the corp is really a shell game. And the 401(k) through the corp will have some sort of ongoing administrative fees.

Why not suggest that he max out his 401(k) through his employer and quit worrying about the match? That's really his best choice (unless he is worried about who administers the 401(k) or what is offered in it).

They can pay her as much salary as possible from the S-corp, and put 25% of that into a SEP plan. Not only with this reflect reality, but they will save the SocSec/Med and matching funds on the SEP contribution, so it increases her SEP buying power by 15.3%, all other things being equal. This keeps things simple and allows them to change the SEP each year as they so choose. Plus the SEP will have virtually no administrative costs since each year stands on its own. And (using extensions) they have until Sep 15 of the following year to pull the trigger on the SEP - a time when they have a pretty good idea of how the current year is going and what their cash needs may be.

Maximum flexibility, low costs, simple administration, and tax savings - I like it.

[equinecpa]

I forgot something key in my original post -they want to set up a ROTH 401k...