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Does a 401k make sense for me?

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  • Does a 401k make sense for me?

    Can you guys help me with the math on my 401k proposal?

    I can put away 54k/yr using a new comparability PS/SH plan but would need to contribute 24k to employees (if all employees defer up to match) with a plan that costs 3k to administer.  I'm currently in the 33% bracket.  When I retire I assume I'll be just in the 28% bracket.

    So I'd be paying 27k to defer taxes on 54k which doesn't seem to make a lot of sense.  wouldn't I be better off just paying the taxes now?  or alternatively do a SIMPLE which lets me defer 21k/yr assuming income of 300k?

    alternatively I could do a PS/SH nonelective match and the employee contribution would be 17k, so I'd be paying 20k to defer 54k.  Still not sure this makes sense either.

  • #2




    Can you guys help me with the math on my 401k proposal?

    I can put away 54k/yr using a new comparability PS/SH plan but would need to contribute 24k to employees (if all employees defer up to match) with a plan that costs 3k to administer.  I’m currently in the 33% bracket.  When I retire I assume I’ll be just in the 28% bracket.

    So I’d be paying 27k to defer taxes on 54k which doesn’t seem to make a lot of sense.  wouldn’t I be better off just paying the taxes now?  or alternatively do a SIMPLE which lets me defer 21k/yr assuming income of 300k?

    alternatively I could do a PS/SH nonelective match and the employee contribution would be 17k, so I’d be paying 20k to defer 54k.  Still not sure this makes sense either.
    Click to expand...


    Have to remember most people will still not contribute, even up to the match. I'd look up what the participation rates are, etc...and you'll be shocked theyre pretty low. There are a couple of other things you can do that are over my head but someone else will chime in.

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    • #3
      I take it you are the only partner?  Certainly seems like bad math if you have to contribute that much for the employees!

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      • #4




        Can you guys help me with the math on my 401k proposal?

        I can put away 54k/yr using a new comparability PS/SH plan but would need to contribute 24k to employees (if all employees defer up to match) with a plan that costs 3k to administer.  I’m currently in the 33% bracket.  When I retire I assume I’ll be just in the 28% bracket.

        So I’d be paying 27k to defer taxes on 54k which doesn’t seem to make a lot of sense.  wouldn’t I be better off just paying the taxes now?  or alternatively do a SIMPLE which lets me defer 21k/yr assuming income of 300k?

        alternatively I could do a PS/SH nonelective match and the employee contribution would be 17k, so I’d be paying 20k to defer 54k.  Still not sure this makes sense either.
        Click to expand...


        You bring up an excellent point, particularly for a one-owner business. Honestly, though, I think employers typically look at the decision from the perspective of the plan as an incentive to hire and keep good employees and don't run the numbers.

        In your situation, the SIMPLE and a 3% employee match might make more economic sense, depending on your priorities as articulated in your financial plan. Also, don't forget that you'll save the annual administration costs of a 401k, typically $2k - $3k/yr. Not necessary for a SIMPLE plan. The tradeoff is:

        • Lower annual contribution to your retirement plan, and

        • Can't take advantage of tax-free backdoor Roth conversions


        If you are analyzing this from a strictly very basic financial perspective and you are going to invest $54k regardless then, yes, depending upon your census, it could make more sense to open a SIMPLE and invest the rest in a taxable account.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          Keep in mind that SH Match contributions don't count towards some of the nondiscrimination tests required by new comparability PS plans. A poor plan design could cost you more to your employees.

          Most 401(k) Plans with New Comparability Profit Sharing allocations are able to give the owner at least 85% of the total benefit. Of course, this depends on the company demographics. You should consider comparing the contribution estimates and fees for other providers, most of which offer free proposals.

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          • #6




            Can you guys help me with the math on my 401k proposal?

            I can put away 54k/yr using a new comparability PS/SH plan but would need to contribute 24k to employees (if all employees defer up to match) with a plan that costs 3k to administer.  I’m currently in the 33% bracket.  When I retire I assume I’ll be just in the 28% bracket.

            So I’d be paying 27k to defer taxes on 54k which doesn’t seem to make a lot of sense.  wouldn’t I be better off just paying the taxes now?  or alternatively do a SIMPLE which lets me defer 21k/yr assuming income of 300k?

            alternatively I could do a PS/SH nonelective match and the employee contribution would be 17k, so I’d be paying 20k to defer 54k.  Still not sure this makes sense either.
            Click to expand...


            You need side by side analysis, similar to what's done here:

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

            The analysis has to be comprehensive and compare apples to apples over time under a set of assumptions (Fed/state brackets, investment returns, years invested, cost for both plans in terms of employer contribution and admin, etc).  The idea is to look at the aggregate effect of all of the factors over several decades, and that can help you see the big picture as well as what factors can affect your decision going forward (for example, changing of the plan demographics might help the 401k plan).

            The issue with the SIMPLE is that keep significant money after-tax and pay the taxes on it.  However, once your employer cost starts creeping up, you can do SIMPLE plus after-tax and in some cases this comes out ahead of doing a 401k plan.  Another thing to consider is adding a spouse to the payroll to increase contributions that way.

            Also, maybe you might need a better design illustration and maybe there is a way to optimize your design.  While there is no guarantee, all of these factors have to be considered before making a decision.
            Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

            Comment


            • #7




              I can put away 54k/yr using a new comparability PS/SH plan but would need to contribute 24k to employees (if all employees defer up to match) with a plan that costs 3k to administer.  So I’d be paying 27k to defer taxes on 54k which doesn’t seem to make a lot of sense.  wouldn’t I be better off just paying the taxes now?  or alternatively do a SIMPLE which lets me defer 21k/yr assuming income of 300k?

              alternatively I could do a PS/SH nonelective match and the employee contribution would be 17k, so I’d be paying 20k to defer 54k.  Still not sure this makes sense either.
              Click to expand...


              Triad , with Employee Fiduciary it will cost you 1.5k to administer and $500 for New comparability testing , and they are great .

              It looks like your 401k payroll is too high for one dentist, around 300-310k?(or you do not have 2/3 of NHCE employees at least 11 years younger than you to pass group rate test and have to give higher % to pass the test for New Comparability) ?

              The best what you can get with New Comparability is 5%-5.5% of eligible 401k payroll . Also you have 1 year waiting period with semiannual enrollment and 6 year vesting schedule for profit sharing.

              With Simple, if all employees contribute up to match you still would need to match 8.5 k and you would end up with lower pretax deferral and no 1 year waiting period .

               

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