Author Topic: Accept profit sharing offer or just take the (gross) money?  (Read 1029 times)

tk2356

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Hi all,

DW is the only employee in her company (it's a European firm trying to expand to the U.S.), and they offered her a raise to be divvied up by however she sees fit. She's trying to decide if it's best to take the increase to her gross salary, or put most of it towards a profit share at the end of the year. Here are the details:

Current salary is $5,500/month gross. Raise is $1,400/month, spent however she deems fit. She's tempted to only bump up her gross salary to $6,000/month and accept the rest as a profit sharing amount at the end of the year. This would be good for a few reasons:
    - We live in NYC and want to keep our taxable income low
    - We don't (and won't) need the immediate income; only going towards the 'stache
    - It saves the "mother" company in Europe a bit of money, minimally reducing the cost of keeping the U.S. branch open

Cons:
    - not a lot, but the 401k is with Merrill Edge, and the expenses are much higher for their S&P 500 index fund than Vanguard's (where we'd put the money otherwise). This could cost her a lot over time, I think.

Is there any important aspect to profit sharing I'm missing? I'm a gov employee so am not at all familiar with the concept, but it seems like a great way to grow the 401k and avoid the immediate NYC tax hit. What would you guys do?   Thanks in advance!

seattlecyclone

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #1 on: July 22, 2020, 04:23:47 PM »
How high is the expense ratio in the 401(k), and how long does she plan to keep this job? Remember that she'll be able to roll over her Merrill 401(k) to a Vanguard IRA when she leaves. The farther into the future that is, the more the higher expense ratios in the 401(k) funds will start to matter.

I'd be highly tempted to choose the 401(k) option regardless. Tax deferral is (usually) a great thing!

tk2356

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #2 on: July 22, 2020, 04:35:14 PM »
Hi Seattle,  the Merrill Edge asset-based cost is 0.52% of the total sum. Not crazy high but definitely could be better! She intends on staying there for a long time (at least 8-10 years) but they could always decide to cut the branch, so it's really up in the air.

That's a good point about rolling it into a Vanguard IRA after she leaves -- thanks for the advice!!

SunshineGirl

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #3 on: July 22, 2020, 04:52:46 PM »
One reason to take it all in a salary increase is that the cumulative effect of that is far higher than taking it as profit sharing at the end of the year.

A $1400/month raise is $16,800/year in perpetuity (as long as she works at the company). That's $84,000 more in five years, $168,000 in ten years--not to mention the compounding effect if she invests it. Plus, if she leaves the company, she will be able to command a higher salary with the higher base salary.

So I'd say that it as a raise for sure.

tk2356

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #4 on: July 22, 2020, 05:02:14 PM »
One reason to take it all in a salary increase is that the cumulative effect of that is far higher than taking it as profit sharing at the end of the year.

A $1400/month raise is $16,800/year in perpetuity (as long as she works at the company). That's $84,000 more in five years, $168,000 in ten years--not to mention the compounding effect if she invests it. Plus, if she leaves the company, she will be able to command a higher salary with the higher base salary.

So I'd say that it as a raise for sure.

Wouldn't that same amount (likely higher due to lower taxes) be felt on the 401k side though if she went the profit sharing route? The profit sharing amount wouldn't go away either, so the compound effect is similar regardless of which path you take. I view it as as a "less taxes now vs. higher fees" question.

The base salary argument for a follow-on job is a great point. We hadn't thought about that!

ender

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #5 on: July 22, 2020, 05:09:24 PM »
Is she guaranteed the money if she quits midyear?

I'd have a hard time signing up for a once a year bonus if I could have the income spread out monthly.

tk2356

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #6 on: July 22, 2020, 05:28:44 PM »
Is she guaranteed the money if she quits midyear?

I'd have a hard time signing up for a once a year bonus if I could have the income spread out monthly.

She is! They're pro-rating the amount so it can start in September, and pro-rate it if she leaves the company for some reason. The once a year bonus vs income spread out will be about a $5-6k difference in interest over ten years... very good point!

Dollar Slice

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #7 on: July 22, 2020, 07:02:13 PM »
Is this a once-a-year bonus based on profits, or is it a profit sharing plan? If it's a profit-sharing plan you need to get all of the details before anyone can decide which is better. I had a profit-sharing plan at a company a while back and employees had no control over where the money was invested. The company put it in very safe, low-return investments. Not ideal.

tk2356

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #8 on: July 22, 2020, 07:35:32 PM »
It's a profit sharing plan but will act as a once-a-year bonus. Since she's the only employee, they basically told her, "We're spending $XX,XXX on you next year, do whatever you want with it." And DW acts as the employer herself since she's the only worker at the U.S. branch. The money will go to the Merrill Edge 401k option she chose, basically your standard S&P 500 index fund (with higher fees).

If she doesn't want to keep the profit sharing plan, she can change it to be entirely gross pay next year or any year after. Since we're in a higher tax bracket this year and likely next (because of my work), I think we'll elect the profit sharing plan and just reassess next year.

Laura33

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #9 on: July 23, 2020, 07:24:15 AM »
So the question is whether they will "count" money in the profit-sharing plan as part of her salary for the purpose of granting future raises.  If her company is like many others and issues raises/COLA adjustments based on salary, you want that base number to be as high as possible. 

As long as the company treats this as part of her salary for future raises (or assesses future pay on some other basis), and it's just a question of does she want it in her paychecks or does she want it in her 401(k), by all means, put it in the 401(k)!!  My firm has that "extra" 401(k) profit-sharing at the end of the year, and it almost triples what I can put away tax-deferred, and BOY has that compounded into a huge difference over time.  Having extra tax-sheltered space available is a fantastic privilege, so take advantage of it. 

JetBlast

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #10 on: July 23, 2020, 11:22:46 AM »
I’m confused by the profit sharing terminology. It sounds like she got a raise and has to decide whether she wants it all in her paycheck or some of it deposited in her 401k. Is this amount variable, based on yearly results of the company, or is it a fixed amount going forward? 


Laura33

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #11 on: July 23, 2020, 12:40:24 PM »
I’m confused by the profit sharing terminology. It sounds like she got a raise and has to decide whether she wants it all in her paycheck or some of it deposited in her 401k. Is this amount variable, based on yearly results of the company, or is it a fixed amount going forward?

FYI, I don't know the specific details of it, but there is a provision that allows employers to offer profit-sharing contributions to certain employees in their 401(k)s if they meet certain requirements -- in our case, we as the partners are the "owners," so we can vote to distribute some of the profits as profit-sharing into the 401(k)s as long as our lower-paid employees meet certain thresholds for their own 401(k) contributions (so sometimes we need to increase theirs so we can use the 401(k) for ours).  The catch is that the combined total of that and regular 401(k) can't exceed some total figure -- but that total figure is a lot higher than the regular 401(k) limits (like $50-60K or so)

Fuzz

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Re: Accept profit sharing offer or just take the (gross) money?
« Reply #12 on: July 26, 2020, 08:36:26 PM »
Can she incorporate an LLC and have the company hire the LLC? It's the same net cost to the company. Then she can open a solo 401k, which allows for huge contributions, plus an HSA. If she gets to control show she's paid, I'd go that route in a heartbeat.

You say it's 5500 gross plus a raise of $1400. That 5500 gross is more like 6400 to the company (spitballing, NYC may have special taxes, plus it's a European company so who knows what kinds of taxes they pay at home on her labor), so with the raise, the total cost to the company is in the zone of $8K month for her labor. If she got paid a flat 8K/month on a 1099, she's at 96K for the year. Per a solo 401k, she could contribute 25% to her own 401K as the employer (~24K) and ~19K as the employee, for a total tax deferral of $43K ish per year. Then if she does an HSA and expenses a bunch of things, she can further reduce taxable.

The shortest route to FI, imo, involves a solo 401k.