SEP IRA under S-Corp

[SpaceGhost]

First time poster - be gentle!
I am (single, no kids) self-employed S-Corp and just learned today from my CPA that I (my company) can only contribute 25% tax deferred of the amount we set my salary.  I (as employee) cannot make the max. $5500 tax deferred contribution because my AGI is over $71K.

I set my salary at $50K and my company can contribute 25% or 12.5K, but with my AGI over the 71K I'm capped.  Frustrating.

So, other than a Roth option, would anyone have any thoughts on more tax deferred options?  To help, I do not have an HSA and don't plan on getting one - cost to tax defer ratio isn't pleasing.

Going forward I will open an i401K for 2016 but can still only get to 12.5K (based on $50K salary) and 18K as employee = 30.5K.  I'd really like to add another 10K or so in tax deferral but not quite sure how to go about it.  Any thoughts would be most welcome and thanks in advance!

[protostache]

The simplest option is to up your salary. There are other fancier options but they cost a lot to run (variable life insurance or defined benefit plan) so they're typically not worth it.

[SpaceGhost]

Thanks, yes that is an option but not sure it's the one I want (not sure how many other options there are, honestly).  Raising my salary obviously raises my taxes, and being self-employed S-Corp I pay both halves. 

i'm tempted to just dump the extra funds into an investment account (im at vanguard) and possibly convert to Roth in the future. 

I'm very new to all this but have no debt other than mortgage which i am not interested in paying off.  Just looking to maximze tax deferred first and where i can't do that, continue funding an investment account.  As i said, I am new and learing and looking to see what suggestions everyone may have.

thanks again for your comment

[jwright]

It is a balancing act; you want to reduce taxes by keeping the salary low but still have the retirement options and those two goals are at odds.

Did you already defer $18K with a 401K?  You can combine that with a profit sharing plan that would shelter an additional 25%.

Also remember there is a tax credit for the costs to implement the retirement plan ($1,500 over three years).

[SpaceGhost]

Thanks for the info.  I am unaware of the tax credit to implement the plan.  Will look into that!

So, any additonal funds beyond tax deferred contributions mentioned in OP would be better suited for brokerage account (vanguard) or Roth?  Pro/Con one way or the other?  Ultimately that is up to me i realize, but just curious if others have been down a similar path.  Either way the funds would be buy and hold.

[dandarc]

SEP IRA is the incorrect type of account for you.  Go with a Solo 401K.  Not sure what is involved in switching, but you can defer way more with a soloK than a SEP at your income.

As a bonus, anything you defer into the SEP / soloK gets deducted from your MAGI, and you're at an area where you could pick up some tIRA deduction space as well.

ETA: And actually, that extra tIRA money should factor into your S-Corp salary vs. dividend calculation, if you'd use it.  Might even get into the saver's credit range, which would further push you towards taking salary. 

Not sure of your exact numbers, but it is conceivable that the S-Corp is actually costing you more on saved income tax than it is saving you in self employment taxes.  If you are able and willing to max out a SoloK and a tIRA.  This is where doing your taxes yourself can be a huge boon - probably 90%+ of your accountant's clients are better off taking a lower salary from the S-Corp and therefore paying a higher dividend, but if you want to save a ton as most of us do on this board, you might be in that 10% that is an exception to the rule.

[dandarc]

Incidentally, how far above 71K is your MAGI?  The 18K deferral alone on the soloK could take you to under the 61K limit and thus render a 5.5K tIRA contribution deductible.  Doesn't get you 100% to where you want to be, but a lot of the way there.

[SpaceGhost]

Dandarc
thanks for your thoughts.  Yes, going forward for 2016 i will be setting up i401k later this year to increase tax deferral.  If i can find a way to still fund $5500 to an IRA that would be awesome.

My MAGI for 2015 was just over $90K.  I think I know where you're heading with that thought.  The 18K is close to getting me under the $71K.  If my MAGI drops a little for 2016 then I may hit a sweet spot and have both i401K and IRA tax deferred.  Is that in line with what you were thinking?

edit:  for 2015, i will probably open a ROTH and max it out at $5500.

[dandarc]

Exactly - so your MAGI is 90K.  Get an 18K employee deferral on the i401K and you're at 72K.  You could bump up your salary and then defer more and slide into where the tIRA deduction saves you money.

Starting at 90K MAGI though, you're probably saving more on the self-employment taxes by keeping the salary low - there is quite a ways to go to get to where the tIRA is fully deductible.

[SpaceGhost]

awesome!  thanks again.

so, going forward this year i will open an i401K and begin funding that for 2016.  it will probably make sense to stop funding my SEP IRA and look to rollover those funds (in future) into a new Roth that I will open this evening and fund max for 2015.  I will probably open a tIRA as well in the hopes that I can better manage my MAGI year to year and contribute tax deferred to both the I401K and tIRA.  My SEP has a little over $45K in it.  What is the best way to roll the SEP funds over into a Roth?  Should this happen all at once or should i do this over a couple of years?  TIme is not criticial on this. 

[dandarc]

Going from SEP IRA to Roth IRA is a taxable event - it is a conversion.  I can say that with certainty because a SEP-IRA only holds employer money, which always goes into a traditional and not a Roth account. 

Either roll it into your new i401K or a tIRA.  I'd call a broker that offers both the SEP IRA and i401K and have them walk you through the process.  Vanguard customer service always seems to know what's up on these types of things, but their i401K isn't too great - only investor share mutual funds, not even ETFs available - last I checked.  Which reminds me I really need to get my i401K over to TD Ameritrade.