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    more than one retirement plan allowed?

    Client is an s corporation, single member, no other employees. He has a SEP IRA set up for the last couple of years. 2017 he also made an IRA contribution.

    Now they are asking about setting up a 401(K) for the owner/employee. I have never had a business that had 401(K) set up for employees. So I am not knowledgeable about this at all.
    It seems to me that they can have EITHER the SEP IRA or the 401(K) for the employee....not both. Am I correct?

    If I am correct, what are the advantages of 401(K) over the SEP IRA? I do think that you have to have a plan administrator for a 401(K). The SEP IRA would not require that.

    Any advice would be appreciated.

    Thanks

    Linda F

    #2
    The solo 401(k) has lots of advantages for the plan provider - administrative fees and usually inferior and/or high-fee investment options. Those generous fees generally pay for the investment advisors' yachts. But where are the customers' yachts?

    I'm betting this decision is being driven by his "investment advisor" (a/k/a salesperson). The only advantage I know of with a solo 401(k) is a higher contribution limit. Unless he's maxing out his SEP and also wants to consistently contribute SIGNIFICANTLY more, I don't know of a single reason to adopt a solo 401(k).
    Last edited by JohnH; 08-28-2018, 07:21 AM.
    "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

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      #3
      He can have both, but deferral would be limited to max allowed on each and also the max of the highest allowed plan.

      The 401 may have a higher overall, or the SEP may have a higher overall depending on the income level.

      A starting point may be to ask client WHY he wants a 401.

      Comment


        #4
        All good points. The first question I want answered is why does he want a 401(k)?

        Does he want to make the max. tax deductible contribution towards retirement?

        Will he have any employees in the future?

        If the first answer is yes and the second no, a defined benefit plan (assuming this is not a young person), may provide the max tax deduction. The reason for this is that older people can contribute much more than young people for the same level of benefit.

        I have one client a doctor that has a DB plan.
        Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR

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          #5
          Originally posted by kathyc2 View Post
          He can have both, but deferral would be limited to max allowed on each and also the max of the highest allowed plan.

          The 401 may have a higher overall, or the SEP may have a higher overall depending on the income level.

          A starting point may be to ask client WHY he wants a 401.
          I'm having trouble understanding why there is so-much anti solo 401K. Kathy - I'm not sure what you meant there but SEP plans do not allow deferrals. (Ignoring the no longer allowed new SAR-SEPs). John H - The big companies such as Vanguard and Fidelity have pretty easy to complete forms to establish a plan without any financial advisor involvement.


          Perhaps, I miss something but I think the Solo K will give a bigger benefit until you reach the "big bucks" level where the plans would be equally capped at $55,000.

          SEP = Profit Sharing Contribution
          Solo K = Profit Sharing Contribution plus elective deferral

          Solo Ks allow catch-ups for taxpayers 50 or older. SEPs do not.

          Maybe I'm in the minority but I think these plans are good for the single owner/employee that Linda asked about.

          Comment


            #6
            Originally posted by New York Enrolled Agent View Post
            I'm having trouble understanding why there is so-much anti solo 401K.
            I agree that solo 401(k) plans are just fine for a small self-employed person. Maybe the investment choices are slightly more limited or the fees are marginally higher, but at least you are paying them with pre-tax dollars! And setting one up isn't very hard, as mentioned the larger investment firms have DIY forms to use.

            Also, 401(k) balances are often treated differently from IRA balances in other matters, so having the ability to roll money from one to the other could be a benefit as well.
            "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

            Comment


              #7
              Originally posted by New York Enrolled Agent View Post
              Kathy - I'm not sure what you meant there but SEP plans do not allow deferrals.
              Not salary deferral, but none the less deferring income tax to some future date.

              Comment about asking why was to ascertain clients goals. Many times a client says they want to do something, and asking a few questions as to their goals helps us guide them.

              Also, we have no idea as to what income level client is, age, how much already in retirement accounts, etc. Too often people think they should absolutely defer as much tax as possible to the future even if it's not in their best long term interest.

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                #8
                answers

                Client is 52 and wife is 49. The S corp actually is in the name of both of them but she is not an employee of the company. He paid himself around $39,000 last year and each of them had K-l's for around $20,000.00. His is a service business, installing a garage doors and some repairs. I recently convinced them to set up SEP IRA for husband. I am sure they are trying to save for retirement and reduce tax liability.
                The kids are now grown so there is just the two of them. in 2017 the company put 25% of his wages in SEP IRA. They also made the maximum allowed IRA contributions. So they put away over $20,000 last year. I think that is pretty good.

                Let me see if I understand correctly. If he has 401(K) company would contribute and he could contribute also. Could he still have the SEP IRA? If the income is below limits, they could also contribute to individual IRAs.
                As long as he had no other employees, he is ok. But if he hires any employees then the company would also have to offer the 401(K) to the employee. Correct?

                Thanks

                Linda F

                Comment


                  #9
                  Originally posted by oceanlovin'ea View Post
                  Client is 52 and wife is 49. The S corp actually is in the name of both of them but she is not an employee of the company. He paid himself around $39,000 last year and each of them had K-l's for around $20,000.00. His is a service business, installing a garage doors and some repairs. I recently convinced them to set up SEP IRA for husband. I am sure they are trying to save for retirement and reduce tax liability.
                  The kids are now grown so there is just the two of them. in 2017 the company put 25% of his wages in SEP IRA. They also made the maximum allowed IRA contributions. So they put away over $20,000 last year. I think that is pretty good.

                  Let me see if I understand correctly. If he has 401(K) company would contribute and he could contribute also. Could he still have the SEP IRA? If the income is below limits, they could also contribute to individual IRAs.
                  As long as he had no other employees, he is ok. But if he hires any employees then the company would also have to offer the 401(K) to the employee. Correct?

                  Thanks

                  Linda F
                  They could have both, but I'm not seeing what the point would be to complicate the matter by having 2 plans. Do they want to put more than the 22K a year into qualified plans?

                  They would be in the 12% bracket. While deferring taxes now may seem like a good idea, it may come back to bite them long term. Chances are after they are retired and drawing SS they will be in the situation where pulling extra from deferred accounts will make more SS benefits taxable having an effective rate of 22.2% (12 x 1.85).

                  I'm calculating AGI to be 66K (39 +20 + 20 -13) and taxable at 42K. Reducing the taxable below the 40 K1 income will reduce the 199A deduction, making the deferral even less attractive.

                  Would they be open to putting the IRA amount into Roth instead of Traditional? Open to putting the amount over the 22K allowed into a non-qualified? Qualified dividends and CG on a mutual fund in a NQ would be taxed at zero percent. It would also give them the opportunity to have funds available before 59 1/2 if something tragic happens.

                  If they need to keep AGI below 400% for premium assistance, then that's another story.

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