S-Corporation Profit Sharing Plan

[Sam]

If the questions asked here are not clear, it's because I'm not sure what to ask, given my limited (as in zero) knowledge about S-Corporation.

I had a conversation with an aquaintance of mine, a medical doctor in California. The subject turned to saving for retirement. She told me that she had her own PSP (Profit Sharing Plan) through her own S-Corporation. Charles Swab is the custodian, and the money is being managed by www.fsainvest.com. They charge her 1.5%, and her annual return in the past 13 years is 8%.

Questions:

1) Is S-Corp the preferred way for doctors to save for retirement? She free lances. Is there a better way? Can she do 401k like "normal" people.

2) Is her contribution to the PSP pre-tax like the contribution we make to the 401k plan? Is there a limit to the contribution (15 or 20K)?

3) Is 1.5% management fee a reasonable rate?

4) She was told a few years ago that she had too much in her PSP and it's not advantageous from the tax point of view. So she started to withdraw from it, and have stopped contributing to it. This is totally different from the 401k plan that I know. Does she know what she's talking about?

Thanks

[Webzter]

This is based on my (very, extremely, etc) limited knowledge of s-corps and LLCs.

In response to #1, an S-Corp has no direct bearing on saving for retirement. An S-corp tends to be the preferred method of organizing for professionals. An S-corp can have distinct advantages over both a C-corp and an LLC that may make sense in a given situation.

If she is the only person in her S-corp, she can set up a solo-k and contribute up to the IRS maximum per year (15.5k this year, just like us normal folk).

Through profit-sharing, her "employer" can contribute up to $44k or 25% of net profits, whichever is lower. However, she can only have up to $44k total per year so she needs to aggregate the solo-k and psp together.

Regarding the PSP, I may be way off base and so her first step should be to talk to either an enrolled agent or CPA. But, here's how it works in my instance with my LLC.

I will contribute close to the max to my 401k through my employer. However, I'll probably miss things by a bit. When tax time comes around, I will figure out (well, technically, my EA will figure out), my net profits from my business and how much I missed the cap by. I will write a check to my solo-k for the difference (if I only contribute $15k this year, I will write a check for $500 more). For my employer-side, if I have a net profit of $10k, I will write a check for another $2k to my solo-k as profit sharing.

Hope that helps a bit.

Also, there are some significant differences between a simple-k, solo-k, sep, etc. She seriously needs to consider paying a fee-only financial advisor or maybe a CPA for advice.

[Sam]

Originally Posted by Webzter

I will contribute close to the max to my 401k through my employer. However, I'll probably miss things by a bit. When tax time comes around, I will figure out (well, technically, my EA will figure out), my net profits from my business and how much I missed the cap by. I will write a check to my solo-k for the difference (if I only contribute $15k this year, I will write a check for $500 more). For my employer-side, if I have a net profit of $10k, I will write a check for another $2k to my solo-k as profit sharing.

Thank you Webzter. Do withdrawals from your solo-401k follow the same rule as the normal 401k plans. That is 10% penalty before 59.5, unless it's one of the exceptions. The contribution from the employer-side, does it become 100% vested immediately? After 59.5 (or using the 72(t) rule), withdrawals are considered regular income, just like the normal 401k plan, correct?

[Webzter]

> The contribution from the employer-side, does it become 100% vested immediately?

As far as I know, vesting is a function of the company, not of IRS tax code. Blackout and vesting periods are cost and retention issues (ie, can't join for the first six months, vest over 4 years). If she wants all bases covered, in that case, she could just pass a resolution stating that employees and company officers are immediately vested at 100% for all profit sharing.

Also, to my knowledge, the solo-k's are covered under the same laws regarding distributions as a regular 401(k).

However, just to remind you, she would be less than $1k in seeking professional advice from a tax lawyer, enrolled agent, cpa, or financial advisor. Frankly, she'll save herself significantly more than that in the event that she is audited if she's working with someone to keep every 'i' dotted now.

If you or her feel that she's getting bad avice from one of the aforementioned professions now, then I'd highly encourage her to get a second opinion from someone with more fiduciary responsibility than an anonymous post on an Internet forum ;-)