S Corporation with single owner/employee: salary vs. distribution with goal of maximizing retirement accounts

[liztaylor972]

@kwintessenz No, you are limited by your earnings minus payroll taxes (you can only contribute income and payroll taxes are taken out before 401k contributions). So he'd have to pay himself a little bit more than 57k and can then contribute it all to a 401k as 'voluntary' contributions as long as he has a plan which allows them.

 

[kwintessenz]

@liztaylor972 Got it. That makes more sense now. Thanks!!

 

[lilbrenda]

@kellim This is my understanding as well. 100% of your set salary cannot be getting dumped into retirement accounts, per these restrictions.

I made a spreadsheet to calculate mine and try to balance maxing out retirement, staying under the 25% cap, and balancing my salary vs distribution ratio.

But, I was told that the "safe" ratio was 70/30 with only 30% of your total compensation being distribution. My accountant may just be ultra-conservative though?

 

[kellim]

@lilbrenda I would agree that is conservative. Personally I kept it 50/50 so as to not worry and make the math easy. Then I switched to using bonus pay in payroll to quit having to deal with extra frequency of tax payments manually and lump sums. Now Gusto just takes care of it for me.

 

[liztaylor972]

@lilbrenda There is no 'safe' ratio, it is case dependent and varies based on the nature of the business and your work for it. The IRS doesn't use a ratio to trigger an audit and leaning back on a ratio won't be an adequate defense if you happen to be challenged.

 

[liztaylor972]

@kellim He is making post-tax voluntary contributions and converting them to Roth. So we aren't talking about employer contributions which are limited to 25% of wages.

 

[vitalyocean]

@liztaylor972 Yes, this is 100% correct. I should have specified more, but I didn't realize it would be so important.

Anyway, what @liztaylor972 said is correct. In fact, my W-2 earnings go first to Roth 401k (up to 19.5k), then the rest to an Traditional 401k as after-tax contributions (up to 19.5k). The after-tax contributions get rolled over periodically into my Roth 401k as in-plan rollovers.

 

[fbg]

@vitalyocean Why are you not making pre-tax contributions? Seems like that is a pretty significant tax advantage to give up.

 

[vitalyocean]

@fbg Good question. I max out the Roth contributions at 19.5k, which means I can't do any pre-tax contributions, and thus I can only do 19.5k after-tax contributions (which get rolled into Roth). I favor having everything in Roth based on speculation that taxes will only go up in the future, so I prefer to pay now.

 

[kwintessenz]

@liztaylor972 Huh? OP said he was contributing 100% of his salary to the 401k and wants to know if he should pay himself exactly the contribution limit. Where did you get "post tax" for the 401k portion? (Not talking about the Roth portion.)

 

[liztaylor972]

@kwintessenz He said he was doing in plan rollovers to a Roth - if you are familiar with the context he is doing what is sometime called a 'mega backdoor Roth' where he is contributing after-tax to the 401K and rolling it over into a Roth. If you aren't familiar with the context then you may not have understood that from his post.

 

[613jono]

@vitalyocean I would not trust reddit tax advise.

Be careful what you take as salary vs a distribution. If you are a doctor taking 50k salary and pulling 300k in distributions, I don't think the IRS will like that very much.

 

[613jono]

That was my first thought. This person is clearly making considerably more than 45k per year which makes the token "as required by the IRS" kind of silly.

 

[vitalyocean]

@613jono Just to be clear, I'm not trying to pull a fast one here. From what I can tell, this is a sanctioned and well-known advantage of the S Corp structure. The IRS may close the loop hole, but currently, it's legal and I'm not trying to be sneaky.

 

[613jono]

@vitalyocean I also own an S Corp. You are supposed to pay yourself a fair and reasonable salary. It's pretty clear from your post that you're doctoring it to pay yourself as little as possible to minimize taxes while maximizing your retirement gain. If you're paying yourself 45k and making 200k you will be in trouble in an audit (however unlikely, so roll those dice).

There have been a few other posts mentioning this.

 

[vitalyocean]

@613jono I'm paying myself what someone in the area in which I live would make typically for the job that I'm doing.

I do appreciate the skepticism, though, since it's always helpful to have multiple sets of eyes on these things.

 

[wirralcs]

@613jono Hey wet blanket, you don't know how much he is making. Stop defaulting to being a narc perhaps and don't contribute to the Conversation if you don't have anything useful to add

 

[vitalyocean]

@613jono Yes, good point! My salary is a market-appropriate salary for what I'm doing. I am just doing more than that in business!

 

[stefanm]

@613jono This really. Don’t you have a fucking account in somewhere you can ask the shit about? You operate an s Corp. without an accountant??

 

[vitalyocean]

@stefanm You'd be surprised what you can do with Quickbooks, TurboTax for Business, and an eagerness to learn and understand the rules. Accountants don't possess some magical ability to understand and make good decisions that the rest of us don't have!