Author Topic: Individual 401k Contributions for Working Spouse  (Read 307 times)

pmac

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Individual 401k Contributions for Working Spouse
« on: June 13, 2022, 01:27:26 PM »
I currently have my own small business set up as a single member LLC with an S corp election.

I have an individual 401k plan that I max the employee contribution to every year, and put about $12k into the employer contribution.

My wife works full time in my business as well, would it be worth it to add her to the individual 401k plan also?

My understanding is that I would have to pay here as a W-2 employee in order for her to have 401k contributions.

The business nets about $250K/year.

Thanks!

SeattleCPA

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Re: Individual 401k Contributions for Working Spouse
« Reply #1 on: June 16, 2022, 09:52:42 AM »
She needs W-2 wages for the 401(k) to work. It's from those wages that any employee elective deferral comes... and then the employer match is based on those wages.

So, with zero wages, no employee or employer contribution.

Doing what you propose is a way to jack up your retirement savings. You double the amounts contributed obviously.

Two things to consider:

1. What you pay your spouse needs to be reasonable. And BTW if you ever get audited by the IRS, with two owners, you'll be defending two owners' salaries. (I haven't had this problem, but a CPA friend has had IRS agent want to jack the spouse's W-2 to match the FT owner's W-2.)

2. Remember that payroll tax savings are true savings. But retirement account savings are really deferrals you pay back later. E.g., you may be paying $3K or $6K in payroll taxes to delay when you pay $6K of income taxes on $20K of income. That usually doesn't make economic sense.

pmac

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Re: Individual 401k Contributions for Working Spouse
« Reply #2 on: June 16, 2022, 05:48:03 PM »
Thanks @SeattleCPA !

I purchased your ebooks to help set up my single corp LLC, and also purchased the book on setting appropriate wages. Super helpful!

Your response makes sense to me.

SeattleCPA

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Re: Individual 401k Contributions for Working Spouse
« Reply #3 on: June 18, 2022, 08:11:52 AM »
Thanks @SeattleCPA !

I purchased your ebooks to help set up my single corp LLC, and also purchased the book on setting appropriate wages. Super helpful!

Your response makes sense to me.

:-)