The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Jesstache on March 11, 2015, 03:42:37 PM
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A little background is required before I get to my question.
My husband is an engineering manager at a small-ish company making $142k gross. I do consulting for the company as a 1099 employee (self employed). I have been in this role a little over a year, such that 2014 is my first full tax year in this role. He has been at the company about 3 years. Every year he contributes the max to his 401k plan, so this past year $17500. I work part time (16-24 hours a week) and last year my net income was approx $38k.
I have been looking into setting up a SEP IRA for myself but have not as of yet. I was waiting to see exactly how much taxes I would pay as a self employed person, which was much less than I had budgeted for.
Today, the company's accountant notified my husband that he is going to get about $12,000 back from his 2014 401k contributions due to a lack of participation and contribution rate from the rest of the company. BUMMER!
My question is, can I still set up and fund a SEP IRA and contribute the 20% net self employment income and have it apply for 2014 (this wold be approx $7.6K). Then I would (I guess) put the remainder in a traditional IRA.
The company accountant suggested I set up an LLC S-Corp with me as the only employee and then put all of his excess, in as an "employer contribution" for myself and any additional savings we want pre-tax up to the amount I make from my 1099 gig. This year it'll be closer to $72k. I don't think I'd be able to do this option to put all that $ tax-free for 2014 purposes.
To make matters even more fun, I've already filed our 2014 taxes so whatever I do, unless it's to put that $ into a traditional IRA or spend it (ha! no) will require me to file an amended return.
We make too much for Roth IRA.
Any advice? The accountant's S-Corp suggestion sounds like the best plan going forward and that'll be HUGE tax savings if what he's saying is correct. I'm going to be researching like crazy tonight.
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Hi there.
You may want to confirm with your employer’s plan administrator which tax year the $12,000 returned contribution will apply to. Typically the IRS allows “corrective distributions” to be included as income in the year the refund is made, rather than the year the original contribution was made.
My guess is that your husband will receive the returned contribution in 2015, and then a corresponding 1099-R for the 2015 tax year (sometime in early 2016). If this is the case, 2014 would be a non-issue and you have bought yourself some time to determine your best option for the 2015 tax year.
It sounds like your employer’s plan may have failed the annual Average Deferral Percentage (ADP) test, meaning non-highly compensated employees (less than $115K) did not make enough elective deferrals.
That really is a bummer; I would be crazy irritated.
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My question is, can I still set up and fund a SEP IRA and contribute the 20% net self employment income and have it apply for 2014 (this wold be approx $7.6K). Then I would (I guess) put the remainder in a traditional IRA.
Yes. You have to get on it though!
The company accountant suggested I set up an LLC S-Corp with me as the only employee and then put all of his excess, in as an "employer contribution" for myself and any additional savings we want pre-tax up to the amount I make from my 1099 gig. This year it'll be closer to $72k. I don't think I'd be able to do this option to put all that $ tax-free for 2014 purposes.
SEPs only have employer contributions. A solo 401k has both the $18k employee contribution and the 20/25% employer contribution.
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Thanks all. I looked more into the S-Corp with Solo 401k last night and I think that's the way I'll go for 2015 since we'll likely have the same problem again this year. That way we can contribute somewhere in the ballpark of $32k pretax through that, plus the measly $5k he'll likely be limited to through his employer. Should save a ton off our 33% marginal rate.
I'm just glad our company accountant brought it up because I would have not known about this option if it weren't for him. I should buy him a beer or two :).
Now to set it all up...