Retirement plan option for sole prop. Or s corp

[Guest]

I am looking for retirement plan option for wife. She is a sole prop. At present looking into s corp in the future. Gross $400 k, net $200 k, roughly.

We do backdoor roth IRA so no other ira will work. That leaves us with 401k or sep (do not want to do sep). I feel 401k might be very expensive and employees may not use it. I say that because:

We have 3 employees (in CA) and they walk in with Starbucks coffee in the morning & get some drink from there in ther afternoon, bags of chips and cookies in the break room, everyone has an i watch and an i phone (i have neither). I am paying them reasonable salary. Now, we feel we cannot afford to buy coffee/lunch from outside (we pack lunch daily) on daily basis. They must be living paycheck to paycheck and if contributed, will end up taking early withdrawal with penaly/taxes. I simply do not wish to contribute a match as well as bear the burden of fiduciary insurance and plan operation fee and take on the risk of early withdrawal from the employees.

So, what are the options? What if all employees decline to participate? Do we need that in writing?

[Kamban]

I am / was in a similar position. I don't know what the current laws are but 17 years ago I asked my CPA this questions.

His answer was that if you have full time employees you have to offer them the same plan at the end of 2 years in case of SEP IRA ( 401K at that tiem was too expensive). My employees were just like yours, living paycheck to pay check. They certainly did not want to contribute to the IRA but wanted the match. Then came the stock market crash of 2000 and I knew that if they had contributed they would have blamed me for the losses, since they did not have the stomach for the losses or the will power to ride out the crash. Since I did not have another business to open a separate retirement account I decided to forget it and just contribute to non deductible IRA. I use my taxable income in stock and real estate investments and have come out better than if I were forced to contribute for them in order to take advantage of my own SEP IRA contributions.

Things might have changed since then but I am now past doing any tax deductible retirement savings.

[litovskyassetmanagement]

wci wrote:

I am looking for retirement plan option for wife. She is a sole prop. At present looking into s corp in the future. Gross $400 k, net $200 k, roughly.

We do backdoor roth IRA so no other ira will work. That leaves us with 401k or sep (do not want to do sep). I feel 401k might be very expensive and employees may not use it. I say that because:

We have 3 employees (in CA) and they walk in with Starbucks coffee in the morning & get some drink from there in ther afternoon, bags of chips and cookies in the break room, everyone has an i watch and an i phone (i have neither). I am paying them reasonable salary. Now, we feel we cannot afford to buy coffee/lunch from outside (we pack lunch daily) on daily basis. They must be living paycheck to paycheck and if contributed, will end up taking early withdrawal with penaly/taxes. I simply do not wish to contribute a match as well as bear the burden of fiduciary insurance and plan operation fee and take on the risk of early withdrawal from the employees.

So, what are the options? What if all employees decline to participate? Do we need that in writing?

Click to expand...

You can consider a SIMPLE IRA as a starting point.  If your wife can contribute $53k (and if you are also on the payroll can can contribute ~$20k or so) then it might make sense to do a 401k with profit sharing.  This article will give you the pros and the cons of the two types of plans:

http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

SEP is not an option because it is too expensive.  If you want to do profit sharing, you'll need a design study done for your 401k plan to make sure it is cost effective.  This article describes what is involved in setting up a custom-designed 401k plan:

http://www.dentaltown.com/Dentaltown/Blogs.aspx?action=VIEWPOST&b=143&bp=3376

 

 

[Guest]

Thank you for your valuable information. Will my wife still be able to do backdoor Roth IRA contributions, should she proceed with SIMPLE IRA? I understand that the employer need not contribute if the employee did not contribute, correct?

[litovskyassetmanagement]

wci wrote:

Thank you for your valuable information. Will my wife still be able to do backdoor Roth IRA contributions, should she proceed with SIMPLE IRA? I understand that the employer need not contribute if the employee did not contribute, correct?

Click to expand...

No backdoor Roth with SIMPLE.  SIMPLE is a really nice plan and you can set one up directly at Vanguard.  However, sometimes docs set it up because it is 'low cost' forgetting that they are paying huge taxes on the money not contributed to a retirement plan, so out of pocket cost shouldn't be the determining factor.  Giving money to the employees is the best thing you can do to help yourself save more money on taxes - the math often works in the favor of having a profit sharing plan, and often a Cash Balance plan can be added on top to make the whole arrangement even more in your favor, so don't let the out of pocket cost lead you to making the wrong decision - it is the net cost vs. the net benefit that has to be considered prior to adopting a plan. One thing to remember is that you can not switch to a 401k midyear and have to wait the full year to do so.

[Guest]

very useful info. Thank you. If we switch to 401k in the future, the monies in SIMPLE IRA will have to be re characterized (taxable event), if backdoor roth is desired.