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  • #16




    Thanks, everyone.  For clarification we are a group of 3 physicians and we all have our own S-corporations (pass-through entities).

    The account that I am referencing is an individual 401k/solo 401k.


    Clarify whether the partnership has adopted the individual 401k plan with each of you having accounts or that each of you has your own one-participant 401k plans/accounts and whether the individuals or the S-Corps are the partners.

    If you are receiving K-1s in your names, you are the partners in the partnership even if all of you have S-Corps. As stated before, individual partners can not have their own plans and the partnership must adopt the single plan with each of you having separate accounts. The employer contribution must be the same for all.

    Controlled/Affiliated Service group rules are quite complex. If the S-Corps are actually the partners. Based on the fact pattern you supplied. It is quite possible the S-Corps are in a controlled or affiliated service group with the partnership.

    Additionally, if you have non-owner/non-spouse employees in the practice. You might be in violation of anti-discrimination regulations and business structure regulations designed to protect your employees from such types of machinations.

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    • #17


      I’m afraid you are probably in the majority, because that’s what I think as well.  Aside from backdoor Roth, I prefer to do the conversions prior to age 70 and 1/2, especially if the doc wants to retire relatively early (giving them more time to convert their tax-deferred assets to Roth).  Partial conversion might be warranted as a hedge if the account value is substantial (the longer one lives the more benefit from prepaying taxes will be realized).
      Click to expand...


      hmmmm - this might be a fun poll.
      Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #18







        Thanks, everyone.  For clarification we are a group of 3 physicians and we all have our own S-corporations (pass-through entities).

        The account that I am referencing is an individual 401k/solo 401k.


        Clarify whether the partnership has adopted the individual 401k plan with each of you having accounts or that each of you has your own one-participant 401k plans/accounts and whether the individuals or the S-Corps are the partners.

        If you are receiving K-1s in your names, you are the partners in the partnership even if all of you have S-Corps. As stated before, individual partners can not have their own plans and the partnership must adopt the single plan with each of you having separate accounts. The employer contribution must be the same for all.

        Controlled/Affiliated Service group rules are quite complex. If the S-Corps are actually the partners. Based on the fact pattern you supplied. It is quite possible the S-Corps are in a controlled or affiliated service group with the partnership.

        Additionally, if you have non-owner/non-spouse employees in the practice. You might be in violation of anti-discrimination regulations and business structure regulations designed to protect your employees from such types of machinations.
        Click to expand...


        Right, that's an affiliated service group. If all of the S Corps are adopting a single plan, they will be fine, so that's not a problem.  You can have multiple entities adopt a single plan doc, and have the same plan, I401k at Vanguard included.  However, if they have a single non-partner/non-spouse employee, they would be completely done.  For that reason once you have partners it would be best to get a TPA and a plan doc, and then if they want to, they can use VRIP accounts at Vanguard to invest on their own (though ideally at that point a low cost record-keeper would be best to keep things in compliance, because if such partnership grows bigger, it will have a huge headache trying to keep track of SDBAs for various partners).  The cost of doing all of this is minuscule compared with the benefit.
        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


        • #19
          Thanks everyone for the input - it's interesting to see that not everyone is in agreement on the issue of Roth vs. non-Roth 401ks.  I have to admit that a lot of the discussion is a bit over my feeble physician brain.

           

          To clarify things - we all use separate retirement account providers ... to be honest I do not even know which retirement plans are being used by my partners ... could be i401ks or sep IRAs.

           

          I am a big-time believer in the Boglehead philosophy of keeping things EXTREMELY simple.  All of my retirement accounts are invested in Vanguard Index Funds with extremely low expense ratios (Total stock market, total international stock market, total bond market - that's it) and my taxable investment account is also with Vanguard - (no bonds here, just total stock market and total international stock market).  I like the idea of having everything in one place.  Open to any/all suggestions if I should change anything.

           

          My current plan for 2018: max out HSA (already done), make backdoor roth contribution (already done), max i401k (contributions made on monthly basis), then invest extra money in taxable account and also save some cash.

           

          Thanks!

          Comment


          • #20




            Thanks everyone for the input – it’s interesting to see that not everyone is in agreement on the issue of Roth vs. non-Roth 401ks.  I have to admit that a lot of the discussion is a bit over my feeble physician brain.

             

            To clarify things – we all use separate retirement account providers … to be honest I do not even know which retirement plans are being used by my partners … could be i401ks or sep IRAs.

             

            I am a big-time believer in the Boglehead philosophy of keeping things EXTREMELY simple.  All of my retirement accounts are invested in Vanguard Index Funds with extremely low expense ratios (Total stock market, total international stock market, total bond market – that’s it) and my taxable investment account is also with Vanguard – (no bonds here, just total stock market and total international stock market).  I like the idea of having everything in one place.  Open to any/all suggestions if I should change anything.

             

            My current plan for 2018: max out HSA (already done), make backdoor roth contribution (already done), max i401k (contributions made on monthly basis), then invest extra money in taxable account and also save some cash.

             

            Thanks!
            Click to expand...


            Ok, we got a potential problem.  As a partnership, you must adopt a single plan document.  You can't all have different I401ks at different providers, SEPs, etc.  That's not allowed, because you have a controlled/affilated service group, and you have a SINGLE employer, the partnership.  So there are potential compliance violations there that must be addressed.
            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


            • #21
              Thanks Kon - I'll address with the issue with my partners & accountant.

              Comment


              • #22
                Also, you didn't indicate whether the practice has eligible non-owner/non-spouse employees. If so, you have bigger anti-discrimination problems to clean up.

                Unfortunately, many accountants and other financial professionals are not that knowledgeable about the retirement plan complexities of partnerships and corporations. This is especially true when there is multiple levels and/or overlapping control.

                You may very well need the expertise of a retirement plan specialist. As Kon pointed out, these situations are not well suited for off-the-shelf turnkey plans.

                Comment


                • #23




                  Also, you didn’t indicate whether the practice has eligible non-owner/non-spouse employees. If so, you have bigger anti-discrimination problems to clean up.

                  Unfortunately, many accountants and other financial professionals are not that knowledgeable about the retirement plan complexities of partnerships and corporations. This is especially true when there is multiple levels and/or overlapping control.

                  You may very well need the expertise of a retirement plan specialist. As Kon pointed out, these situations are not well suited for off-the-shelf turnkey plans.
                  Click to expand...


                  Docs often complain that their accountant didn't do anything for them with respect to various retirement plan issues, and I don't blame the accountant, there is a limit to their expertise in this area.  In this case they might only see the S corp, but not the partnership, unless there is someone taking care of both business and personal taxes.  And often those are ad-hoc plans, and docs erroneously think that just because they have separate S corps, that somehow they are insulated from anything else if they have no staff. If the accountant allowed this to happen in the first place, something tells me they are not going to be of much help, but it's worth a shot.
                  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


                  • #24
                    I think your age is important as well. If you are 30, the money will have 30+ years to compound with you never having to worry about a cent of tax. However, if you are 55 and plan to retire in the next 5 years (and you will need the money at 59.5 for retirement), then the Roth 401K probably will not compound enough to justify the tax savings.

                    I think most in the forum will agree that Roth savings is paramount in the early years of your career. I hope that additional tidbit helps.

                    Comment


                    • #25
                      Thanks Main - yeah so I'm young(ish) at 37 and probably won't retire until my early 60s.  From everything I have read it appears that I may be on the right track with making the full employee contribution to the Roth side.

                       

                      Kon - we do not have any other employees - it's just the three of us.

                      Comment


                      • #26
                        Can someone explain to me how time has anything to do with roth or traditional 401k?

                        I understand the RMD side of the argument (somewhat).

                        The time and compounding argument passes over my head. If tax rates decrease over time (yes, a variable but a likely scenario), how will the roth come out ahead?

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                        • #27
                          (By tax rates decreasing - I meant ones relative effective rates pre vs retirement)????

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                          • #28




                            Can someone explain to me how time has anything to do with roth or traditional 401k?

                            I understand the RMD side of the argument (somewhat).

                            The time and compounding argument passes over my head. If tax rates decrease over time (yes, a variable but a likely scenario), how will the roth come out ahead?
                            Click to expand...


                            I don't understand why you think tax rates decreasing is a likely scenario. The typical argument is that you'll be in a lower tax bracket, which is not the same as tax rates decreasing. I think there is a good chance that tax rates will increase and that the RMDs from IRAs, 401k's and 403b's will be higher than high earners and savers are anticipating so that they won't be in the 15% tax bracket (now 12% - 22%) that is often presumed.

                            Plus, I think many high earners will be leaving a chunk of IRAs to the next generation, who will be early in their careers and will be required to take distributions over their lifetimes at even higher tax rates. A Roth is, imho, superior and, also imho, the door won't be open to contribute and convert indefinitely.

                            Finally (going beyond your original question), comparisons are generally done based upon investing the taxes saved. In real life, that is not common, so you end up with even less saved than you would have with the Roth.

                            I'm not anti traditional-401k/403b, I just wish HIPs would be a little more judicious about their retirement choices and not presume that they should always max out the pre-tax space.
                            Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                            Comment


                            • #29
                              My wife and I are both physicians and we’re in our mid 30s. Starting this year we are doing all Roth 401k contributions. I’m certainly not a fan of paying the extra $13690 in federal taxes this year (37% x $18500 x 2), but knowing the money will never be taxed again is great. I suppose the tax laws can always change, but I figure previous Roth accounts would be grandfathered.

                              Comment


                              • #30
                                sorry, i should further clarify my post.  i have personal questions about this matter and i think it may help answer some for the OP as well.

                                yes, @JF, i was referring to one's reduced effective tax rate in retirement.  i realize that you responded before my clarification was posted.  (that was also supposed to be a smiley face after my comment, not four question marks -- new poster...)

                                taking several variables out of the equation for the sake of argument:

                                1. future tax rates - who knows

                                2. any windfall or alternative situation where someone would have a large amount other than their wages, albeit W2, etc

                                3. one has to forecast what his/her effective tax rates will be in retirement based on the amount withdrawn/spent from retirement accounts.

                                so here goes... i have a partner who makes around 600k.  she chooses to contribute to a roth 401k instead of a traditional 401k due to the 'power of compounding interest'.  i will be in a similar scenario, so i wish to know if she has a valid point or if she is uneducated in the matter

                                i believe that the traditional fallacy is when people compare certain equal amounts in regards to trad and roth 401ks.  for example, if you pick $5000.00 to invest, and you run numbers on both, then yes - it is certainly advantageous over time that the roth 401k will come out ahead.  however, this is apples to oranges as the true amounts should be a pre-tax amount (ie nearly 8000.00 if one's effective rate is near 40%) vs 5000.  i know many know this, but if you plug those two numbers in a compounding interest calculator at the same growth rate and the same pre and post tax rates - the end result is the same.  i point this out because i dont believe that many understand this concept.  (i know those on this forum including JF and KL understand it).

                                so - if doctor joe smith has an effective tax rate at 30% in one of his peak earnings years at age 45, contributes 18500.00 and plans to withdraw this money at age 65 where he will have a projected effective tax rate of 25% - how does the roth 401k ever come out on top mathmatically??

                                im currently contributing to a traditional 401k for the reasons stating above.  im not trying to be right, im trying to figure out if im right or wrong and maybe clarify for the OP and others!

                                thanks everyone for their input/expertise!!!

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