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Self-Employed Retirement Savings Plans
Old 06-02-2007, 09:35 AM   #1
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Self-Employed Retirement Savings Plans

We currently have a SEP IRA for DH through his law practice. He's a solo practitioner, but he also has 4 employees (including me). I like the fact that he can contribute up to about 44k a year if his income supports it for himself, but I am not crazy about the fact that in order to do that we have to contribute 25% of salary to all employee's IRAs as well. Every year I run the numbers and it always turns out that we are within a couple thousand dollars on the contributions to employees of what we would have paid in taxes on the money we contributed for DH to his SEP IRA. But, it essentially means we are making that contribution after tax since we are paying the "tax $" to our employees. Great benefit for them!

So, I'm looking for ideas on other options for self employed individuals.

Assumptions are that between his self employed income and what he pays me we would have on average 225k a year of income from his business. I've also got a corporate j*b currently and contribute the max to my 401k there. Any suggestions?
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Old 06-02-2007, 10:28 AM   #2
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Tracy,

If your SEP IRA is the same as a SIMPLE IRA, then your percentage of contributions for your employees is incorrect.

From the IRS web site:

What employer matching contribution is generally required under a SIMPLE IRA plan?

Under a SIMPLE IRA plan, an employer is generally required to make a contribution on behalf of each eligible employee in an amount equal to the employee's salary reduction contributions (including catch-up contributions), up to a limit of 3 percent of the employee's compensation for the entire calendar year.

That could save you guys some $$$......

If your SEP IRA is something different, then maybe you could set up a Simple IRA??

Not sure if I'm helping or not....but additional info can alway be had at IRS.gov
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Old 06-02-2007, 10:34 AM   #3
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Originally Posted by Tracy42 View Post
We currently have a SEP IRA for DH through his law practice. He's a solo practitioner, but he also has 4 employees (including me). I like the fact that he can contribute up to about 44k a year if his income supports it for himself, but I am not crazy about the fact that in order to do that we have to contribute 25% of salary to all employee's IRAs as well...
Contributing to the other employees isn't as bad as you may think.

Make the profit-sharing contributions in lieu of bonuses, so that saves you on the payroll taxes.

Also, it makes them feel loved, thus helping employee retention.

You always have the option of contributing 0% to 25%, so that gives you great flexibility to contribute less of a % when you have no more qualifying employees and more of a % when you may have some employee turnover with less qualifying employees.
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Old 06-02-2007, 03:19 PM   #4
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Quote:
Originally Posted by Tracy42 View Post
So, I'm looking for ideas on other options for self employed individuals.

Assumptions are that between his self employed income and what he pays me we would have on average 225k a year of income from his business. I've also got a corporate j*b currently and contribute the max to my 401k there. Any suggestions?
DBP - while they are being phased out by many companies due to cost, it may make sense to implement a Defined Benefit Plan (Pension) for your husband's practice. Depending on specific calculations (and depending on the ages of the other people), you could end up with a massively favorable funding ratio, even far above the $40k that the SEP IRA allows.

My employer went to a DBP. The owner (in his 60s) was able to put away $270k/year with the DBP, and the amounts for the other employees (due to their ages and income levels) was considerably less than 25% of their income. If your other employees are all younger than you and your husband, his high wage combined with his/your wage could allow the two of you to sock away far more, as well as reduce the amount you contribute for your other employees (again, if they're younger). Some companies can set it up for about $1,500, and annual fees of about $1000 to administer.

Or, what if you just go to a traditional 401(k) plan, and have the company match any employee's contribution 2x up to a certain percentage? That way, you and your husband can still contribute $31k total, and your company can put in an additional amount. Depending on the match, the total amount you'd have to contribute for your other employees would undoubtedly be far less than the 25% you're contributing now. Fidelity and (I think) Vanguard can set up a 401(k) with good fund choices for a low fee.

--Peter
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Old 06-02-2007, 03:35 PM   #5
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Tracy,

I don't know in what capacity you work for your husband's practice, but let's say it's bookkeeping. Could you spin off as a separate S-corp, provide the same services you provide now to his firm which pays your corp in return.

Form a 401k/defined benefit retirement plan in your s-corp and pack it as full as you can. As an added bonus, you could retain some earnings in the S-corp as long as you pay your self a reasonable salary. While you'd have to pay the self-emp amount on your salary this would be low due to 401k deductions, and earnings left in the corp are treated different from regular income (no SE tax, lower rates in many cases). He can hold off on the retirement plan in the practice since yours will be rolling.

I heard that one on the radio. I have no idea whatsoever if I recalled it correctly or whether it is plausible. Might check it out.
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Old 06-03-2007, 12:43 PM   #6
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Thanks for the ideas--keep'em coming.

SEP IRA and Simple are different, but I do need to review the Simple to see if it would provide a greater benefit for DH and myself.

Funding the employee IRA at 25% is definitely a nice employee benefit. Odd thing is I think the employees would prefer 1k in their pocket presently over 6k in the Vanguard IRA. They just don't get it and don't really seem to appreciate the concept of retirement planning This may be a genie that won't go back in the bottle at this point, though, since we've been operating like this for about 6 years, but it never hurts to review all your options.

DB Plan is not an option currently as all employees are older than DH and self.

Currently I do office management, bookkeeping, hiring/firing employees, but I also help on the legal work too. I'll have to give the S Corp idea some thought to see if it would bear pursuing.
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Old 06-03-2007, 01:15 PM   #7
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It might be worthwhile to look at a 401k profit sharing plan as you can classify employees into different groups and vary the contributions for those classes. You may be able to put your professional employees (your husband) into a class that pays quite a bit more into the plan.

Traditionally these plans were rather pricey, but it seems like there are more and more providers offering them at low cost.
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