Maximizing Contribution Limits
I can’t find any information on combining different types of retirement accounts to achieve the best combination for maximizing contribution limits while keeping start up and maintenance costs down.
First, it is my understanding that 401k(403b, etc.) and its self employed counterparts, SEP, Simple, Solo 401k, and Keogh plans are all qualified defined contribution plans that all have a current combined cap of 49000, and all have no affect on TIRA and Roth contribution limits. Is that correct? I would also like all the details on tax deductiblility. My understanding is that 16500 would be deductible to the self employed persons tax return, and the remainder would be tax deductible to the business.
Okay so here’s where it gets interesting.
How does a Solo Defined Benefit Plan(190K current max contribution) affect qualified plan limits if at all?
If a self employed individual wanted to maximize low maintenance cost contributions, could he/she take out both a Simple and a SEP? Lets say $80,000 in earnings(after the 1/2 se tax) could he contribute the 11500 to the Simple and then .25 * 80,000 = 20,000 more in a SEP? Or 80,000-11500 = 68500 * .25 = 17,125?
Could you set up a Simple with a Solo 401k and do the same as above?
When you set up any of these vehicles can you put in the plan documents the ability to frequently convert to Roth IRA?
Given this type of information. To get this mapped out the best I can, what is the best option for each of these scenarios(this doesn’t have to precise, I just want to be able to better map these options in my head). And if you can only have one of the plans above at a time, don’t really worry about answering this.
Self Employed Income, Employee Income, Annual Investment Contibution
100K, 0, 50K
200k, 0, 100k
500k, 0, 400k
80k, 50k, 40k
50k, 80k, 40k,
100k, 50k, 80k,
300k, 50k, 250K
Permalink Submitted by mk foss on Mon, 2009-10-19 21:06
If you have a SIMPLE plan, you cannot have another retirement plan for the same business.
A 401(k) plan and a 403(b) plan can have a “Designated Roth Account” feature.
Most of the people who post here are expert on taking money out of plans, not putting it in.
Permalink Submitted by Jon Dennison on Mon, 2009-10-19 21:13
Name Change less personal
I realize that most are experts on taking money out.
What if I had multiple businesses.
My situation. I will soon be an RIA under my fathers firm. I will also be signed with an FMO, and have income from overrides I receive from a sales job that I’m currently in. The FMO provides us with profit sharing relative to what we produce. I am an independent contractor in the sales job that I am in, and probably will incorporate that as an LLC. I also will either be apart of my fathers LLC or have my income reported to my personal LLC, but still marketing myself under my fathers LLC.
So does that mean that I can have a Simple plan with the sales LLC(11500), and then a SEP or Solo Roth 401K, or even a Solo Defined Benefit plan(or 2 of those) set up under my RIA LLC, plus the profit sharing plan from the FMO?
Permalink Submitted by Joseph Arsenault on Mon, 2009-10-19 22:05
That would be a record-keeping nightmare..
Create a parent LLC, that way all the earned income flows through one LLC in the end and use that entity to set up a 401(K) / Profit sharing chassis. If you do the plan documents correctly you should also be able to fund a SEP as well.
The total of the 401(k) / Profit sharing can max at 49k (depending on your earned income through the LLC). If you need to put more away you may need to create a Defined Benefit plan..
Anyways, that’s just a suggestion to explore.. it depends on the a lot of facts and circumstances.. If you’re not affluent in this area you should probably consult a local CPA or tax professional.
-J
Permalink Submitted by Jon Dennison on Mon, 2009-10-19 22:57
What benefit would there be in having both a Solo 401k(probably Roth 401K), and a SEP? I guess the big question is, can you reuse % of income in the calculations. Solo 401K = 100% of income up up to employee max, and then 20% of net until 49K. So if I made 100K, I would get 16500 + 20,000 = 36500. Are you saying that I can also set up the SEP and get another 25% * 100,000(minus 1/2 SE tax of course) and get another 25,000? Obviously that would be over the limit and therefor I would only invest 49000 – 36500 = 12500. Is that correct???
Also on another subject, what do you think is going to yield more. A Solo Defined Benefit Plan invested in securities and requiring actuarial maintenance(i.e. more cost). Or 412 i that is fixed and runs on tables and requires no actuarial maintenance?
Permalink Submitted by Jon Dennison on Tue, 2009-10-20 02:45
Okay after perusing the tax code for a while. I see why the Simple was thrown out as something that could be used in combination with any other plan. The IRS has explicitly stated that in the code, but the good news is that it doesn’t explicitly say that in relation to any other Self Employed/Small business account, so that probably means that you can combine a Solo 401k and a SEP. The IRS code also seems to attribute Simple plans on a per business basis and not on a per person basis. So if an individual owned to businesses, It seems that he could have a simple in lower paying one and a SEP in the other. Now that I think about it though, I probably would still rather have the solo 401k because then I get an addition 5K in tax deductibility to the individual at 100% of compensation.
The only question that I still haven’t found out yet, and one that I doubt is I’ll fine in the tax code. But it is the million dollar question. How do I calculate the amount I can put away in a company with both a solo Roth 401k and a SEP?
So Self Employed LLC produces a net income of 100K. It would be my understanding that first 20% of net income on the 401K would put 20K into that vehicle and lower LLC net income to 80K. I would then take 25% of 80K to reach another 20K in available deductibility, but because I know that I am going to be using 16500 towards the personal Roth portion, I only use the difference of that 36500 and the max(49000) or 12500 into the SEP which would the lower my business net income from 80K to 67500. And that would be my compensation for the year correct?
Than after 5 years I can start transferring the Roth portion to a Roth IRA as often as I want?? But can I convert the employer side(also me) 401k and SEP to a Roth IRA? If not it would seem difficult to strategically fire yourself to be able to convert that money, I mean what would you do dissolve your LLC and then reincorporate?
Permalink Submitted by Jon Dennison on Tue, 2009-10-20 04:47
I guess this answers it.
If an employer maintains two or more profit-sharing or stock bonus plans, the trusts under those plans are treated as a single trust for purposes of contribution limitations. [b]If an employer maintains two or more pension or annuity plans, the total deductions for all plans are subject to the limitations that would apply if they constituted a single plan.[/b] When an employer maintains a combination of one or more defined contribution plans and one or more defined benefit plans, t[b]he deductions for all plans may not exceed the greater of 25 percent of compensation otherwise paid or accrued to the beneficiaries during the year[/b] [u]or the amount of contributions made under the defined benefit plans, to the extent that those contributions do not exceed the amount needed to satisfy the minimum funding standard for the plan year that ends with or within the tax year or for any prior plan year. However, for contributions made in years after 2005, this limitation on deductions to overlapping plans only applies to single-employer plans, not insured by the PBGC, making contributions in excess of six percent of amounts otherwise paid to beneficiaries, where contributions to the defined contribution plans are in a form other than elective deferrals.
[/u]
Can someone explain to me the underlined portion please.
Permalink Submitted by Joseph Arsenault on Tue, 2009-10-20 16:59
The underline portion of you text is discussing the minimum funding standards that I believe lie in Sec. 412. Defined benefit plans are partially governed by the minimum funding standards.
Just to clarify, here is some direct text from my tax publisher..
“A self-employed individual’s compensation for qualified plan and SEP purposes is defined as his or her earned income. [ I.R.C. § 408(k)(7)(B)] Under Code Section 401(c)(2), the term earned income for a self-employed individual (including partners in a partnership) refers to the net earnings from self-employment in a trade or business in which the personal services of an individual are a material income-producing factor. Earned income is determined on the last day of the business’s taxable year. Generally, after several adjustments, up to $230,000 of earned income may be considered for plan purposes for plan years starting in 2008. [ I.R.C. §§ 401(a)(17), 404(l)]”
A SEP is definitely a better option for you as a Self Employed individual who sounds like you will have sufficient income to max out the 25% limits.
Depending on your income, a Solo 401k can be an even better option. Here is an example..
$100,000 salary can defer $16,500 and still contribute $25,000 to profit sharing, effecting a 41.5% contribution
If you max out at $49,000, this is when you would consider a defined benefit plan, if you are willing to pay for the administration of it.
As far as your question on 412(i)s, there is no telling which option will yield you more, but there are some advantages to 412(i)s if you use them right. Note that there has been abuse in the past and they are monitored closely.. The advantage lies in the fact that the IRS allows the guaranteed rate of return from the annuities and LI to be used as the hurdle rate, usually lower than the typical 4 to 6 percent hurdle rates. This requires a higher contibution to meet minimum funding standars and essentially allows you to defer more money. That is my understanding at least..
-J
Permalink Submitted by Jon Dennison on Tue, 2009-10-20 20:39
[quote]If you max out at $49,000, this is when you would consider a defined benefit plan, if you are willing to pay for the administration of it.[/quote]
I’m aware of that. This was posted in response to my question from another forum. [quote]It means that, up to 2005, if a single employer had both a defined contribution plan and a defined benefit plan, and the minimum contribution to the DB plan was greater than the 25% combined contribution limit, the employer could contribute the full minimum contribution to the DB plan. The limit itself is repealed for some plans after 2005; you underlined that part too, but please confirm you actually care about that before I try to explain it.[/quote]
The limit being repealed for some plans after 2005, that is what I’m most curious about. Its my understanding that the definition of single employer would include self employed individuals.
Permalink Submitted by Burt Moss on Thu, 2013-02-14 19:48
Can someone contribute to both in the same year? What is the limit?