Discussion:Update to defined benefit question by Beth
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Discussion Forum Index --> Tax Questions --> Update to defined benefit question by Beth
| 8 June 2006 | |
| My client was told by the actuary that she could contribute from 0 to $40,000 to a defined contribution plan for 2005.
This was based on her 2004 schedule C, but for 2005 her net schedule C was only $25,000. Can she deduct a contribution of more than her net schedule C? | |
| 8 June 2006 | |
| Hi ,no she is limited to a 25% or $4647 (after s/e adjustments) of her net sch c income for a DCP. bye | |
| 8 June 2006 | |
| If actuary is involved, perhaps we are talking defined benefit plan? | |
| 8 June 2006 | |
| Gotta be defined benefit. And yes, you could create scenarios where the contribution required exceeds profit. Example, if she had a great 2004 profit, say 100k, and she's 56 years old, and sets up the plan to provide 80% of her 04 salary, beginning at age 62...I don't need an actuary to tell me that she'll be stoking a lot of cash away to make the numbers. The defined benefit is just that..it defines the retirement benefit out, not the amount being put away. A defined contribution or profit sharing plan is the 25% of salary that Wes described. No actuary involved. | |
| 8 June 2006 | |
| I am hoping to clarify my original question.
My basic question has to do with whether or not an individual can DEDUCT more money contributed to a Defined Benefit Plan than their net schedule C. Example- For 2005 my client has a net schedule C income of $11,000. She was told by her actuary that she could contribute anywehere between 0 and$49,000 to her defined benefit plan for 2005. This was based on her previous three years of net schedule C. My question is - Can she DEDUCT in 2005 the $49,000 or is she limited to the $11,000. If she can't deduct the full amount what's the point of making the full contribution to the plan. If she only makes $11,000 what happens in the plan? Does this create a greater deduction in the future? Seems to be lots of issues here. | |
| 8 June 2006 | |
| I don't see any issues. Yes, she can deduct contributions made to the plan without regard to profit. Whether she can use that loss depends on other income she might have, otherwise, it's a NOL...the plan receives money and is happy. | |
| 9 June 2006 | |
| Beth, take a look at Sec. 404(a)(8)(C). Plan contributions cannot exceed the Schedule C net income minus the deduction for one-half of the SE tax. | |
| 9 June 2006 | |
| Crap, Riley. You're gonna make me start a car wash...I've never seen that limitation before. | |
| 9 June 2006 | |
C) the contributions to such plan on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall be considered to satisfy the conditions of section 162 or 212 to the extent that such contributions do not exceed the earned income of such individual (determined without regard to
the deductions allowed by this section) derived from the trade or business with respect to which such plan is established, and to the extent that such contributions are not allocable (determined in accordance with regulations prescribed by the Secretary) to the purchase of life, accident, health, or other insurance; | |
| 9 June 2006 | |
| Thanks, Dennis. I read that, but the bulb didn't light. It makes sense. I did have a client once where we loaded up his Sch. C defined benefit plan, the business was a side biz and he had lots of W2 income, but we never buried more than the profit, so it never came up. This is a quandary for those who set up the plans in big years, committing to the annual cost, and then experiencing a couple down years. They're committed to the money, and then receive no tax benefit from having made the contribution. Nice. So back to Beth, she's clearly limited to the 11k amount, unless she's willing to carryover the undeducted amount to next year. | |
| 9 June 2006 | |
| Hi it is my understanding talking to pension people this am that even though the funding commitment is separate from the deductions (limited by the years sch c) the excess funding's deduction is suspended going forward if your sch c income exceeds the funding limit for the next year. I think this is what JR's last sentence meant. bye | |
| 12 June 2006 | |
| Not quite the same question but can a schedule C taxpayer contribute to both a defined benefit plan and a SEP in the same year? He has max'd out on his defined benefit plan and got wind of additional "deductible" contributions to a SEP. I thought that once you max'd your defined benefit plan contributions you had max'd all deductible contributions for the year. Anyone? | |
| 12 June 2006 | |
| It is possible to contribute to a DBP and SEP in the same year. However, the combined deduction for both contributions may not exceed the greater of 25% of participants’ compensation or 100% of the minimum funding standard for the DBP. See Internal Revenue Code § 404(a)(7). | |
| 10 July 2008 | |
| Adding to this discussion, are the annual administrative expenses of the DBP deductible? and if so is it also limited by net profit/loss | |
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