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Posted by Flip on February 2, 2008, 6:18 am
Question 1: I have a single member LLC, taxed as an S Corp. I have a
Solo 401k established in which case I can max out 46k this year. I
believe I hit my limit of 46k when I make 122k for the year.
(15.5 Salary Deferral + 30.5k Profit Sharing) ; 30.5k= 25% of 122k.
Is my understanding correct.
Question 2: I keep reading that if I ever decide to bring on another
employee, I would need to offer the same plan to them. This confuses
me because for a couple of reasons. The way I understand that is that
it is the employee that can choose how much of his salary he wishes to
put into the retirement plan. Wouldn't this violate being able to
have a solo 401k (Only meant for individuals + their spouse)...
Any clarification would be appreciated.
Thanks in advance.
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Posted by Mark Bole on February 2, 2008, 1:06 pm
Flip wrote:
> Question 1: I have a single member LLC, taxed as an S Corp. I have a
> Solo 401k established in which case I can max out 46k this year. I
> believe I hit my limit of 46k when I make 122k for the year.
> (15.5 Salary Deferral + 30.5k Profit Sharing) ; 30.5k= 25% of 122k.
> Is my understanding correct.
The profit sharing will end up being 20%, since the limit is 25% of
*net* earnings, after the deduction for the profit-sharing.
>
> Question 2: I keep reading that if I ever decide to bring on another
> employee, I would need to offer the same plan to them. This confuses
> me because for a couple of reasons. The way I understand that is that
> it is the employee that can choose how much of his salary he wishes to
> put into the retirement plan. Wouldn't this violate being able to
> have a solo 401k (Only meant for individuals + their spouse)...
I have not researched this but I suppose that once you have an employee,
you can no longer contribute to your Solo 401k, you would have to set
up an allowed plan for the new situation.
-Mark Bole
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Posted by Mark Freeland on February 2, 2008, 2:45 pm
> Question 1: I have a single member LLC, taxed as an S Corp. I have a
> Solo 401k established in which case I can max out 46k this year. I
> believe I hit my limit of 46k when I make 122k for the year.
> (15.5 Salary Deferral + 30.5k Profit Sharing) ; 30.5k= 25% of 122k.
> Is my understanding correct.
The calculation on the employer side is a bit more complex, because you have
to subtract off the employer side of Social Security and Medicare. Even
then there's a wrinkle in the calculation. You can follow the instructions
on form 1040 SE (lines 3-6), or follow Step 1 in this Fidelity worksheet
(it's the same calculation):
http://personal.fidelity.com/retirement/pdf/401K-CW-0902.pdf.
There are other limits, though they rarely come into play. The rest of the
Fidelity worksheet will walk you through them.
> Question 2: I keep reading that if I ever decide to bring on another
> employee, I would need to offer the same plan to them.
Yes, but you might also have to handle it as a full-blown 401(k) plan, not a
solo plan. (Not sure about the conversion machinery, other than the fact
that you'd have to file a full 5500 form annually.)
This depends on whether the other person you bring on is really an employee
or a "member" (the LLC term for a partner). Solo 401(k) plans are for
owners and their spouses, not just for individuals and their spouses. (Note
though that many solo 401(k) providers will not deal with multiple owners -
another fact to keep in mind when selecting a plan.)
> This confuses
> me because for a couple of reasons. The way I understand that is that
> it is the employee that can choose how much of his salary he wishes to
> put into the retirement plan.
There's "employer" and "employee". The "employee" can choose to contribute
any amount of wages up to $15.5K ($20.5K if over 50). The profit sharing
portion is determined by the "employer" (the LLC), not the employee. Note
that in addition to profit sharing, you can set up the plan to do "employer
matching", so the less an employee chooses to contribute, the less the
"employer" contributes - this gives more control to the employees.
> Wouldn't this violate being able to
> have a solo 401k (Only meant for individuals + their spouse)...
See above on members vs. employees.
Mark Freeland
BnetOnewsX@sbcglobal.net
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Posted by Flip on February 8, 2008, 5:11 am
@Mark Bole = You are incorrect. I can contribute 25% because I am set
up as a corporation (S Corp) and not set up as a sole proprietor. 20%
http://www.nbcsandiego.com/smallbusiness/8037660/detail.html
=======================================================================================
@Mark Freeland - Thanks Mark for your feedback. That was informative
and I realize that it is never as basic as it seems.
Let's take the simple example from the worksheet that you referenced.
http://personal.fidelity.com/retirement/pdf/401K-CW-0902.pdf.
-->100k Business Net Profits. (line 1)
The salary deferral (15.5k) from the employee makes complete sense.
The next part is Maximum Profit Sharing. (Lesser of lines 7,8, and 9)
Line 7.... (50% adjusted Net business profits after salary deferral) -
I assume this is probably what you were referring to about other
limits that don't often come into play.
Line 9.... No problem, I get that.
Line 8 is where I have the issue. Why is that 20% of the adjusted Net
Business Profits and not 25%???
The worksheet even states on the first page that you can contribute up
to 25% of compensation. I realize that you can only do 20% set up as
a sole proprietor. Maybe there is a different form?
Thanks,
Phil
>
>
> > Question 1: I have a single member LLC, taxed as an S Corp. I have a
> > Solo 401k established in which case I can max out 46k this year. I
> > believe I hit my limit of 46k when I make 122k for the year.
> > (15.5 Salary Deferral + 30.5k Profit Sharing) ; 30.5k= 25% of 122k.
> > Is my understanding correct.
>
> The calculation on the employer side is a bit more complex, because you have
> to subtract off the employer side of Social Security and Medicare. Even
> then there's a wrinkle in the calculation. You can follow the instructions
> on form 1040 SE (lines 3-6), or follow Step 1 in this Fidelity worksheet
> (it's the same
calculation):http://personal.fidelity.com/retirement/pdf/401K-CW-0902.pdf.
>
> There are other limits, though they rarely come into play. The rest of the
> Fidelity worksheet will walk you through them.
>
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
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Posted by Tad Borek on February 8, 2008, 1:27 pm
Flip wrote:
> Line 8 is where I have the issue. Why is that 20% of the adjusted Net
> Business Profits and not 25%???
Phil, this 25%/20% question comes up a lot. It's 20% because you don't
include the contribution itself when calculating the 25% limit. You're
able to contribute 25% of earned income, but "earned income" deducts out
the SEP/401k contributions...that is a deductible business expense at
the entity level., even if the "entity" is a fiction (meaning, even if
you're a sole proprietor).
In effect your P&L ends up looking like this:
$50,000 net profit for the business
($10,000) compensation expense - retirement plan
= $40,000 earned income
$10,000/$40,000 = 25%
$10,000/$50,000 = 20%
We think in terms of the $50,000 figure, so use 20%. But the rule on
contribution limits is written in terms of the $40,000 figure, i.e. 25%.
Incidentally the $50k figure would be AFTER deducting out half of your
self-employment tax. The online calculators should all do this, like the
one on Fidelity's site.
-Tad
PS if you are a math person note that some simple algebra gets you to
the 20% figure.
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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