Deferred Comp, SEP???
Just had a client say they are receiving 200K from a commission on brokering a sell of goods. They are self employed and already make 400K annually. The client would like to defer this 200K if possible. Is there a deferred comp plan that might work? Is the only option setting up a SEP? Thanks in advance
Permalink Submitted by Alan Spross on Wed, 2012-11-07 20:44
If he has no retirement plan now, a SEP IRA would allow him to defer 20% of his net earnings from employment, but not more than 50k. A solo 401k might provide more deferral than a SEP IRA for lower amounts of net earnings plus an age 50 catchup contribution, but is also capped at 50k plus the catchup of 5.5k if age 50+.
Permalink Submitted by Anonymous (not verified) on Thu, 2012-11-08 19:28
Thanks. So, as a self employed person who makes 4-500K and has a bonus this year of another 200K the most they can put away is 50K in a SEP? They are under 50 FYI. Any other options of spreading out this 200K?
Permalink Submitted by Alan Spross on Thu, 2012-11-08 21:37
No, but this is the year to have high income compared to the future. Next year the Obamacare taxes kick in and no telling how much higher ordinary tax rates will be, especially in the higher brackets.
Income averaging has been gone for a couple decades or more.
Permalink Submitted by Denise Appleby on Fri, 2012-11-09 19:13
[quote=”[email protected]“]Just had a client say they are receiving 200K from a commission on brokering a sell of goods. They are self employed and already make 400K annually. The client would like to defer this 200K if possible. Is there a deferred comp plan that might work? Is the only option setting up a SEP? Thanks in advance[/quote]
A defined benefit plan is also an option that can be considered. The dollar limit for this year is $195,000, but other factors are taken into consideration to determine how much can be added/contributed.
Cons of a defined benefit plan include the high cost of administration, mandatory contribution requirements, and the cost of funding the plan. If this is a one-time thing, then a defined benefit plan would not be a suitable option. If he wants to consistently contribute amounts higher than what is allowed under a 401(k)/profit sharing plan, and can afford the associated cost, a defined benefit plan may be a suitable option.
There are many other factors to consider. Consulting with someone who is proficient and experienced in the area of employer sponsored retirement plans is necessary.