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

[atheistnomore39]

@vitalyocean Do you use a CPA? I’d probably start there.

 

[vitalyocean]

@atheistnomore39 Thanks! No, I do my own taxes (I'm interested in it, so willing to do the learning and take the extra time).

 

[pittpens74]

@vitalyocean you should really have a competent CPA.. they will have you far more money then they cost you

 

[liztaylor972]

@atheistnomore39 I wouldn't, this is a financial planning question not an accounting one.

 

[christinaw]

@liztaylor972 As long as the financial planner he uses has a small business specialization. As he's taking the salary from the S-Corp a CPA may have a more realistic idea of what a suitable salary is to avoid the IRS from asking questions.

 

[liztaylor972]

@christinaw Whether the salary is suitable is a question for tax attorneys who are familiar with the case law - but that is wholly independent from the question of retirement plan contributions.

 

[christinaw]

@liztaylor972 Very true! I'd hope a CPA would know about contribution limits, but it sounds like OP could use a financial planner as well.

 

[kwintessenz]

@liztaylor972 Some CPAs handle payrolls for their clients (mine does), and they do give advice on 401k issues.

 

[liztaylor972]

@kwintessenz I'm sure they do - whether it is truly expert financial advice is a whole other question

 

[vitalyocean]

@liztaylor972 Great point.

 

[faithrose27]

@vitalyocean for the 401k part, you have an employee and an employer portion. the employer portion is something like 37-38k, cant remember the exact #, but the important part is that cant be the entirety of the employees compensation. i believe the rule is a max of 25% of compensation can be for retirement plan.

 

[liztaylor972]

@faithrose27 He is making after-tax voluntary employee contributions and rolling them into a Roth account - there are no employer contributions involved.

 

[graymike91]

@vitalyocean This is a really good article that spells out difference scenarios for maximizing your solo 401k contribution via higher pay to yourself. And treating the employer contribution as an expense.

https://www.thetaxadviser.com/issues/2008/may/compensationissuesforself-employedscorpowners.html

I'm actually working on a calculator that can more easily quantify this for people's decision on which type of retirement account to open (sep vs simple vs solo 401k). So am definitely interested in following this thread to understand what's most confusing that could be simplified with software.

 

[vitalyocean]

@graymike91 Wow... this article was really fantastic! Thanks for sharing.

I'm still trying to internalize it all, since it's complex and the example given has a slightly different goal than I do: they aim to maximize traditional (pre-tax) contributions to the 401k, but I aim to maximize post-tax Roth contributions to the 401k.

The one thing that the article seems to ignore is that, is order to max out retirement contributions, you don't have to rely on the 25% profit sharing. Instead, you can just contribute after-tax contributions to the IRA. But they probably didn't go into that because they assumed the retirement contributions you want are traditional.

 

[laceyl]

@vitalyocean I have a S-Corp as well. Have you looked into a SEP? https://www.investopedia.com/articles/retirement/04/020404.asp

I would ask your accountant for more information.

 

[vitalyocean]

@laceyl Thanks for the recommendation. When I last compared the two, I preferred 401k over SEP due to SEP maxing out contributions at 25-percent of salary. Thus, I can't do my optimization of taking part salary, part non-dividend distributions (since the latter aren't subject to the 15.3% FICA tax)

 

[fbg]

@vitalyocean If you pay yourself $57,000 in salary, your maximum 401k contribution is:

Employer profit sharing: $57,000 x 0.25 = $14,250

Employee deferral: $19,500

Total: $33,750

This is because S-corp 401k profit sharing contributions are limited to 25% of your wages. (https://www.irs.gov/retirement-plans/one-participant-401k-plans)

If you want to max out your 401k you would need to actually pay yourself $150,000 in salary.

 

[liztaylor972]

@fbg Again, this isn't true for the OP who is making post-tax voluntary contributions.

 

[fbg]

@liztaylor972 Where did they say that? I'm not sure the reasoning between FICA vs LTCG makes any sense if the 401k contributions are actually post-tax.