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

[613jono]

@vitalyocean Well, they tend to know more about more laws in general - which could keep you away from getting nailed to the wall in 3 years by an audit

 

[stefanm]

@vitalyocean No but if you shop around just a little you will probably end up with one who has considerable experience. If you’re really lucky you will find the rare breed who is also an attorney.

 

[skimmy]

@vitalyocean "especially if you're like me and think that the long term capital gains tax rate will increase in the future"

Not sure how capital gains is coming into play with any of what you've mentioned. 401k withdrawal will get taxed as regular income when you retire, not capital gains. So, it can be 0% if you're below standard deduction...are much higher if you take too much income that year.

And also, that's why you want to diversify post tax and pre tax retirement.

 

[liztaylor972]

@skimmy The savings from a 401k and IRA contribution (roth or traditional) relative to a non-tax advantaged investment is equal to the savings in taxes.

 

[vitalyocean]

@liztaylor972 Yes, that's what I meant to convey. Thank you for clarifying!

 

[vitalyocean]

@skimmy I should have elaborated more, my apologies! I make the comparison between the two because I am taking those dollars and putting them into investment accounts. The distributions currently go into non-tax advantaged accounts, so I assume 15% in future capital gains taxes; whereas the salary portion currently goes into a 401k, rolled into a Roth 401k, and has 15.3% FICA applied to it.

 

[ddoge9000]

@vitalyocean Also keep in mind you get some of that Social Security back when you start drawing. Between the first bend point ($12K) and the second bend point at $70K, you get about 32% of your FICA "contributions" back. From $70K to the max at $138K to get 15% back.

Will social security be paying out 100% of estimated benefits when you start claiming? That's above my pay grade, but it's worth considering that FICA taxes are not just lost like income taxes are.

If doing a solo 401k, there are calculators out there that help you figure out a good balance of employee vs employer contributions as the math can get tricky since it's self referencing and involves SE taxes too.

 

[vitalyocean]

@ddoge9000 Ok. Nice. Thank you!

 

[byhimforhim]

@vitalyocean There's a lot to juggle here. Also, depending on your total income, you'll need to take Sec 199A W-2 limitation into consideration. You need a CPA that can help you maximize all these benefits without too much risk with the IRS. Source: Am a CPA and this sounds like a classic issue we deal with.

 

[wirralcs]

@vitalyocean Zooming out: what is your total profit going to look like?

I have seen way too many people trying to do some fancy stuff in this area that's largely unwarranted because they're not making enough money yet.

Another way to phrase this: if you spent all the time you're going to spend on optimizing this, on creating something valuable for your customers, would that generate more revenue than whatever tiny optimization you're going for now?

 

[debbie112]

@vitalyocean Another thing you can think about to squeeze a few more bucks into the mix is making your Healthcare plan HSA eligible and maxing that out. It's only about $3500 but the banks for HSA accounts allow investing them. They're untaxed going in and untaxed when you need to pull it out too! My Health Equity account is invested in a few Vanguard accounts.

 

[vitalyocean]

@debbie112 Nice, great rec!

 

[blueashsky]

@vitalyocean I would highly advise you to speak to a CPA on the matter. I think you've got a decent idea of what to do, but you need to make sure you don't end up with IRS-flavored bad juju.

 

[memster]

@vitalyocean I’m in the same situation. 401k is too expensive. I max my SEP, HSA and then Roth IRA.

 

[shell369]

@vitalyocean Nice.

 

[613jono]

@vitalyocean What is the limit on a keough/solo 401k

 

[liztaylor972]

@613jono Which limit? This year the employee pre-tax contribution limit is $19,500 (if you are under 50), the total account contribution limit is $57k (if under 50). If you are making employer contribution that is limited by your compensation, as is your total employee contribution.

 

[613jono]

@liztaylor972 Let’s say as an scorp the salary is 30k, can you add 30k and have the company do a 100% match of an additional 30k - or does the total need to be under 57k?

 

[liztaylor972]

@613jono So the total of employee and employer contribution cannot exceed $57k. Also, the employer can only match a max of 25% of salary.

 

[gavelbrook]

@vitalyocean I’m a CPA