Discussion:Which retirement plan?
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Discussion Forum Index --> Tax Questions --> Which retirement plan?
Heathermarie (talk|edits) said: | 8 November 2009 |
| I have a new client that has started a business and will net about $350,000 this year. He is currently not incorporated, but plans to be S-Corp by Jan 1. He has no retirement so he would like to set up a retirement plan. I was thinking SEP because he can contribute a large amount and I don't think there are income limits on this one. The problem is that he has a farming LLC (completely separate from the S-corp business) and has one employee in the LLC. He does not want to have to contribute the same % to his employee's SEP and I believe that I read that all employees of even related entities would be elgible. Any ideas on this? I don't know what other plan he could have because his income is too great for IRA and a Roth IRA won't help since he needs the deduction. Any advice is appreciated.
Thanks. | |
Southparkcpa (talk|edits) said: | 8 November 2009 |
| Look at the regulations under "separate line of business" (SLOB) to see if there is an avenue to have a plan in the one business and not the other. | |
| 9 November 2009 | |
| Heathermarie -
I've long since concluded that I'll refer most pension work to professionals who do it full time. It's such a complex area, filled with landmines . . . | |
| 9 November 2009 | |
| There's a retirement plan comparison chart at the following website:
http://www.401khelpcenter.com/pdf/retirement_plan_comparison.pdf | |
| 9 November 2009 | |
| Don't think the client call himself a SLOB. Under 414(r)(2)(A), a SLOB must have at least 50 employees.
Take a look at 414(b) and 414(c). | |
| 9 November 2009 | |
| I agree with Smokeytax that the best source for an evaluation and recommendation would be a plan administrator. Having said that, I think a 401-k might be an option since his contribution expense is based on the employee's W-2 wages which might not be too high in a farming LLC. | |
| 9 November 2009 | |
| SEP Ira could work, depending on how many years of service each of the 2 people have. A SEP can choose to exclude individuals who lack 1 to 3 years of service in the 5 years prior to the contribution year. So if client's service in one or both businesses exceeds farm employee's service, it might present the chance to cover the client only, at least for the 2009 year. See Form 5305-SEP for eligibility parameters.
Other than that, some SEP documents allow for permitted disparity aka social security integration. This allows for a discrepancy in the percentage contributed on behalf of the 2, albeit only a few points. See SEP LRM language on IRS web site. Looking forward to next year, a safe harbor 401(k) might provide what you seek. In return for pledging to match 3-4% of the employee's contribution, the client avoids nondiscrimination and topheavy testing and can max out at the $16,500 elective deferral contribution limit for himself ($5,500 higher if at least age 50 by end of the given year). If client seeks the largest possible deduction, a defined benefit plan is the usual choice. Especially if the client is significantly older than the farm employee, there could potentially be a large discrepancy in the contribution percentages. On the downside, a d.b. plan involves higher overhead and greater responsibility. This usually includes the necessity to retain an actuary's services each year. Also, discretion as to the level of funding is significantly limited. I.e., there could be some future year when cash flow is an issue but funding is nevertheless required. A fully insured d.b. plan avoids surprises in funding, as well as the need to hire an actuary each year. But from an investor's perspective, some people don't care for the 'fully insured' aspect. Less complex than the d.b., a profit sharing plan too can factor in age differences and or years of service, thereby yielding a discrepancy in the percentage of pay contributed. These plans are often referred to as having age weighted, cross tested, or points based allocation formulas. It's too late to adopt a safe harbor 401k for 2009. The other plans may still be adopted. A d.b. or d.c. must at least be signed no later than 12/31. The SEP can be adopted as late as the extended due date of the tax return. If the S corp is not in place before 1/1/10, a plan begun in 2009 can be taken over by the S corp next year. Note there is a compensation limit for all of the above plans, in the sense that you can use no more than $245,000 upon which to base the contribution or benefit. So for example, a contribution equal to 20% of pay enables you to reach the maximum contribution limit of $49,000. For a self employed person, pay is the remainder of self employment net income less 1/2 s.e. tax less the contribution itself. A d.b. plan deduction might run even higher. | |
