Self-Emplyed Retirement Plans
I have a client that is presently employed and his employer has a 401-k plan. My client is under age 50 and contributes the maximum amount allowed of $15K into the plan annually. He also contributes the maximum to his IRA annually.
The client also operates a small business and is formed as a SMLLC.The business is profitable and he wants to see if a retirement plan such as a SEP,Simple IRA or Solo 401-k would be allowed.
Question is this. The t/p is maxed out with his IRA and 401-K. Does this prevent him from setting up another plan in the SMLLC.
Second Question: Assume the t/p in the above is a part-time employee and due to wage level can only contribute $6,000 into the 401-k plan and has 2,000 contributed to his IRA.Would he then be allowed to set-up a Solo 401-k plan in the SMLLC and contribute $9,000.
I understand the maximum contribution limits for 401-k and IRA is 15k and 4 k respectively.
Thank you in advance
Permalink Submitted by Martin Helmer on Sat, 2008-08-23 17:48
Question 1–Assuming the two businesses are unrelated under section 414, your client could set up any of the 3 plans you named. Of those 3, the SEP would appear to be your first choice. You could contribute 25% of earnings to it, while the SIMPLE would allow only 2%. The 401k would allow 25% too but the SEP does the same with less administrative overhead and responsibility.
By the way, for 2008 the IRA limit is $5,000 and the elective deferral limit is $15,500.
Question 2–Using the new facts, the SIMPLE or the 401k looks best, depending on the level of LLC earnings. If earnings are approximately $10,000 or less, the SIMPLE provides the maximum deduction. The 401k might allow a few dollars more, but not enough to offset the increased overhead. Either one could potentially allow the remaining $9,500 of “employee” elective deferrals not used in the client’s ‘day job’ plan. In addition, the 401k could still allow the 25% “employer” contribution. The SIMPLE could add a 3% employer match to the employee elective deferral.
The more the earnings are above $10,000 or so the greater is the deduction allowed with the 401k compared to the SIMPLE.
In general, if the IRA contribution will be nondeductible, first see if the client is eligible for a Roth Ira.
I don’t understand why the Ira contribution is only $2,000 in the second scenario, unless there aren’t enough earnings to go higher. If that’s the case, then the SIMPLE looks to be the LLC plan of choice.
Permalink Submitted by PAUL HAGGERTY on Sat, 2008-08-23 20:23
Thanks for your insight.
The thrust of my question was weather or not a t/p would be allowed to have two 401-k plans and contribute $15,500 to each. One through his present employer and one as employer/employee of the SMLLC. For at the end of the year his salary deferrels would total $31,000. There is no relationship between his present employer and the SMLLC.
Permalink Submitted by Martin Helmer on Sat, 2008-08-23 22:32
The $15,500 limit is per person. So if $6,000 is electively deferred at one employer, only $9,500 more can be electively deferred at the other. But what is possible is to double up on the section 415 limit. The limit per person per unrelated employer per ‘limitation’ year is the smaller of 100% of pay or $46,000.
For example assume $30,000 represents compensation with the LLC (assume the one employee is paid via W-2; if instead is self employed-a sole proprietor- need to make a couple of reductions). Further assume we’re using your second scenario. That is, $6,000 was deferred at the day job. If the LLC adopts a 401k plan, then the remaining $9,500 could be deferred. Additionally 25% of pay, or $7,500 could be contributed by the employer, the LLC.