Author Topic: 401(k) employer contribution for the self employed  (Read 3400 times)

Malum Prohibitum

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401(k) employer contribution for the self employed
« on: November 19, 2015, 01:04:19 PM »
I own an S Corp. I am the only employee.  I have a 401(k).  I am the participant and the administrator (duh, since I am the only employee).  I understand that for 2015 and 2016 the total overall contribution I can make to my 401(k) is $53,000.   Does this have to be $18,000 employee salary deferral and $35,000 employer contribution, or can it just be entirely a $53,000 employer contribution?

In other words, is there any prohibition on my S Corp just paying the entire $53,000 into the 401(k)?

If there is no prohibition, is there any downside to doing this?

Malum Prohibitum

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Re: 401(k) employer contribution for the self employed
« Reply #1 on: November 19, 2015, 01:12:55 PM »
One more question - While employee contributions must be made by payroll on December 31, it appears that employer contributions have until April 15 of the following year to be counted as part of the prior year.

Am I correct?

I got the date from here: https://newdirectionira.com/ira-info/contributions/individual-401k
« Last Edit: November 19, 2015, 01:14:46 PM by Malum Prohibitum »

argonaut_astronaut

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Re: 401(k) employer contribution for the self employed
« Reply #2 on: November 19, 2015, 01:14:01 PM »
The total 401k allowed is 53K for employer contributions plus 18K for employee, but the employer contributions can only be up to 25% of your employee wages. So you have to be paying yourself a minimum of $212K to allocate $53k as an employer to your 401k.

Source: https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans
« Last Edit: November 19, 2015, 01:16:08 PM by argonaut_astronaut »

Malum Prohibitum

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Re: 401(k) employer contribution for the self employed
« Reply #3 on: November 19, 2015, 01:22:59 PM »
The total 401k allowed is 53K for employer contributions plus 18K for employee
  I thought it was $53,000 total?  You are saying it is 53 plus 18?

Quote
but the employer contributions can only be up to 25% of your employee wages. So you have to be paying yourself a minimum of $212K to allocate $53k as an employer to your 401k.

Source: https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans
  So the $53k is limited?  Sucks for those with lower than $212k income who have a high savings rate.

I guess I need to keep researching this . . .

Malum Prohibitum

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Re: 401(k) employer contribution for the self employed
« Reply #4 on: November 19, 2015, 01:47:16 PM »
Source: https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

Wow, that's confusing.  It says:

Contribution limits for self-employed individuals
You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

  • one-half of your self-employment tax, and

    contributions for yourself.

Use the rate table or worksheets in Chapter 5 of IRS Publication 560, “Retirement Plans for Small Business,” for figuring your allowable contribution rate and tax deduction for your 401(k) plan contributions. See also Calculating Your Own Retirement Plan Contribution.

TheDudeReturns

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Re: 401(k) employer contribution for the self employed
« Reply #5 on: November 19, 2015, 03:21:07 PM »
Are there other plans you can do first that are easier to manage/setup, such as a SIMPLE IRA or SEP-IRA?

Are you using multiple retirement options open for self-employed types?

Malum Prohibitum

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Re: 401(k) employer contribution for the self employed
« Reply #6 on: November 19, 2015, 04:46:12 PM »
I have a 401(k) with about $73K in it and a traditional IRA with about $7k in it.  Wife as a traditional IRA as well.

I am trying to figure out how to increase what I put in.

I guess I need to earn more money and pay myself more . . . if I want to do the entire $53k.  Obviously, it is not an option to earn $100k, pay half in salary and half in distribution, and save $53k of it in my 401(k).

One of the benefits to doing the S corp was the ability to pay about half my income as distributions, avoiding self employment taxes.

Altons Bobs

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Re: 401(k) employer contribution for the self employed
« Reply #7 on: November 20, 2015, 12:08:42 AM »
You can hire your wife as your employee and then she can participate in your Individual 401(k) too to maximize your total contribution.  ;-)  But your max for yourself is $18k + 25% of your W2 wages, not to exceed a total of $53k.  Your wife will have her max of $18k + 25% of her W2 wages on your Solo 401(k).

protostache

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Re: 401(k) employer contribution for the self employed
« Reply #8 on: November 20, 2015, 06:16:18 AM »
The max for each participant is $53k. The employer portion cannot exceed 25% of your employment income. Since you have an S-corp this is easy: it's 25% of your W2 wages. On top of that, you can contribute $18k as an employee. Remember that you will pay FICA on the employee portion, but no Federal income tax (or state income tax, in most states).


protostache

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Re: 401(k) employer contribution for the self employed
« Reply #9 on: November 20, 2015, 06:19:04 AM »
You can hire your wife as your employee and then she can participate in your Individual 401(k) too to maximize your total contribution.  ;-)  But your max for yourself is $18k + 25% of your W2 wages, not to exceed a total of $53k.  Your wife will have her max of $18k + 25% of her W2 wages on your Solo 401(k).

Yep. Two things to keep in mind: your employer match portions have to be the same for both you and your wife. I.e. you can't give yourself 10% and your wife 25%. Second, your wife's employee contributions will have FICA applied, which means it might not be worth it. You'll have to run the numbers in each scenario to find out.

Malum Prohibitum

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Re: 401(k) employer contribution for the self employed
« Reply #10 on: November 20, 2015, 06:39:17 AM »
Remember that you will pay FICA on the employee portion
  Remember?  I never knew it!

So it is best for me to figure out what 25% is and do that as employer and then do the rest of whatever I can afford up to another $18000 as employee contributions.

Drat!  I was hoping I could just plunk $53k in there to up my savings rate with huge tax advantages.

Oh, well.

Thank you everybody for helping out.

Malum Prohibitum

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Re: 401(k) employer contribution for the self employed
« Reply #11 on: November 20, 2015, 06:44:21 AM »
Since you have an S-corp this is easy: it's 25% of your W2 wages.
  It's easy in hindsight, at or near the end of the year when I know what the W2 income will be . . . 

It is hard to predict with variable income.  I have not kept my W2 income at the same level all year, as I am trying to maximize distributions relative to salary (to reduce payroll tax), while still paying myself a "reasonable" salary to keep the IRS happy.  My income also varies and I have foregone a paycheck here and there when cash in the business is low.

So it's not so easy to plan ahead of time and maximize that 25%.  Maybe I can do a better job of planning in 2016.

tljohnsn

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Re: 401(k) employer contribution for the self employed
« Reply #12 on: November 20, 2015, 06:52:27 AM »
Source: https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

Wow, that's confusing.  It says:

Contribution limits for self-employed individuals
You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

  • one-half of your self-employment tax, and

    contributions for yourself.

Use the rate table or worksheets in Chapter 5 of IRS Publication 560, “Retirement Plans for Small Business,” for figuring your allowable contribution rate and tax deduction for your 401(k) plan contributions. See also Calculating Your Own Retirement Plan Contribution.

Also keep in mind that this section does not apply to you since you are paying your self W2 wages through the S-Corp.  The above applies if you are receiving self employment income, normally reported on 1099 and not W2.