New S-Corp Retirement Plan Options

[FIREontheMTN]

I'm starting and S-Corp company with my wife and need some advise on the best retirement plan to set up so that we can contribute the most money to our retirement accounts.  We will have an employee, so that does limit us slightly.  I am staying with my current company with which I max out my SAR-SEP contribution ($18,000).  I also max out both of our Roths annually ($5,500/ea). 

What are my options for additional retirement plans thru our new S-Corp?   

[minority_finance_mo]

If you can set the employee up as a 1099 (and compensate him/her for the additional payroll taxes), that might open the door to additional contributions as an employer. I'm following to hear back as well, as I may be in this situation this year.

[SeattleCPA]

Probably a SEP is a good option if you and your spouse are only employees eligible AND you can use SEP matching to more easily get to a reasonable compensation level.

I did a pretty detailed discussion of the options here:

http://www.scorporationsexplained.com/what-pension-plans-are-available-for-Scorporation.htm

But keep in mind that it almost never makes sense to pay more payroll taxes so you can get more money into a tax-deferred account. (That 15.3% payroll tax "load" just kills off the tax deferral benefit.)

[miranda622]

My husband and I have an LLC filing as S Corp with a few employees. Last year, we set up a 401k plan through Guideline: http://Guideline.com.
Highly recommend it! Super low fees ($8 per employee per month) and all Vanguard index funds. They have a helpful team and have been very responsive, it also integrates with Gusto, the payroll software we use. We were able to set up a safe harbor plan that matches employees on their contributions up to 4% of salary, which allows us to do $18K each plus our own "employer" match of 4%.

It looks like we can also do a SEP IRA through Merrill Edge, since they have a prototype plan, which none of our employees are eligible for until they hit the 3 year mark, so we'll add any extra we can to that while it lasts.

[Papa bear]

If you can set the employee up as a 1099 (and compensate him/her for the additional payroll taxes), that might open the door to additional contributions as an employer. I'm following to hear back as well, as I may be in this situation this year.

An employee cannot be 1099.  It's either a w2 employee, or an independent contractor that will receive a 1099.   Please do your due diligence to make sure you fall in the safe harbor guidelines for what constitutes the difference.

We will most likely be setting up SIMPLE IRAs this year for my business.  Setting up a 401(k) plan was going to cost approx 4k on the front end and then 1-2k annual fees.  Not a great option if there are only a few people!




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[FIREontheMTN]

But keep in mind that it almost never makes sense to pay more payroll taxes so you can get more money into a tax-deferred account. (That 15.3% payroll tax "load" just kills off the tax deferral benefit.)

This is a great point as I had not actually run the numbers yet.  It may be better for me to just not take a salary, and setup a SIMPLE or SEP for her.  Because I already contribute $18k pre-tax to my SAR-SEP, I believe I am ineligible for further withholdings thru a SIMPLE.  Also, I don't think it would make sense to pay myself a salary just to contribute to a SEP due to the payroll taxes required.  It sounds like to best action plan is to pay her a minimal salary, contribute the max that we can thru a SIMPLE or SEP for her, and just take distributions on the remaining profits.

Does that rationally make sense???

[SeattleCPA]

But keep in mind that it almost never makes sense to pay more payroll taxes so you can get more money into a tax-deferred account. (That 15.3% payroll tax "load" just kills off the tax deferral benefit.)

This is a great point as I had not actually run the numbers yet.  It may be better for me to just not take a salary, and setup a SIMPLE or SEP for her.  Because I already contribute $18k pre-tax to my SAR-SEP, I believe I am ineligible for further withholdings thru a SIMPLE.  Also, I don't think it would make sense to pay myself a salary just to contribute to a SEP due to the payroll taxes required.  It sounds like to best action plan is to pay her a minimal salary, contribute the max that we can thru a SIMPLE or SEP for her, and just take distributions on the remaining profits.

Does that rationally make sense???

You are correct that you've used up your elective deferral with your SARSEP. So you can't get more elective deferral at another employer.

BTW, I love S corporations. I'm like the guy holding a hammer who thinks everything is a nail. But in your case, if you're at or close to the FICA max, it might make more sense to not involve your spouse and just take the earnings as your earnings and use the money to fund your SEP. You can take roughly 20% of your business profits and contribute to a SEP... and then not have any 1120S, 941, 940 tax returns to worry about... and then also not pay much FICA or Medicare. Just an idea.

[SeattleCPA]

One other pension plan comment...

I'm going to check out the link to economical 401(k) plan administrator provided earlier in thread, but if you want to give a hand to employees to provide them with another "tool" to work toward financial independence, I think the Simple-IRA often works pretty well. Most people don't want to save more than the Simple-IRA limits and the admin costs to the employer are really low. Basically zero.

Note: With a Simple-IRA, the employer match is basically 3% of wages.

A SEP, BTW, might allow you to contribute only to your or only to your wife's SEP-IRA account... you can exclude employees for a variety of reasons including if they haven't worked three of last five years. (You can also easily exclude teenagers and then workers covered under a collective bargaining agreement.)

Final comment related to employees: I think in many labor markets (including Seattle where we are) you have to provide a decent pension plan in order to attract the sort of employees to your team you actually want. I.e., we don't see offering a good benefits package to employees as just a cost to be shouldered, but as a way to attract the right folks.

[SeattleCPA]

My husband and I have an LLC filing as S Corp with a few employees. Last year, we set up a 401k plan through Guideline: http://Guideline.com.
Highly recommend it! Super low fees ($8 per employee per month) and all Vanguard index funds. They have a helpful team and have been very responsive, it also integrates with Gusto, the payroll software we use. We were able to set up a safe harbor plan that matches employees on their contributions up to 4% of salary, which allows us to do $18K each plus our own "employer" match of 4%.

It looks like we can also do a SEP IRA through Merrill Edge, since they have a prototype plan, which none of our employees are eligible for until they hit the 3 year mark, so we'll add any extra we can to that while it lasts.

I've now looked at the guideline.com pricing as well as their "standard funds" and at first blush, those plans so look very attractive.

I think an ADP equivalent option costs about $4K a year.. and they're charging (for a really small firm) about $500 a year. (That minimum $40 a month times 12 months.)

The .03% AUM fee seems pretty modest.

[miranda622]

SeattleCPA - yes, we've been really happy with them so far. There's a $500 set up fee, which I think we can get a tax credit for under IRS guidelines, and then it's just $7/month per enrolled employee (which is $28 in our case with 4 eligible employees). I just noticed that $40 monthly minimum on their pricing, it looks like we were grandfathered in before they started that, but even with that, I think it'd still be much better than the alternatives we researched.