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  • Maxing out tax-advantaged space options?

    Long-time lurker here...

    I'll give you some background and my current breakdown (tax-advantaged and taxable investments).  I am employed at an academic medical center through a PLLC as a self-employed physician.  This is how all academic appointments are arranged.  As part of my job, I am also a physician at the VA health center affiliated with my academic institution.  I receive my VA pay directly from the VA (no pass through the academic facility).

     

    Numbers from last year:

    VA pay: $170,000

    PLLC pay: $145,000 (fluctuates based on collections)

    Academic pay: $23,000 (exists so I can participate in the academic institution's benefits: health insurance, child tuition reimbursement, etc.  I actually have to pay this salary back pre-tax on my P&L every year)

     

    Current contributions:

    5% TSP with 5% match: $17,000

    PLLC profit-sharing/401K contributions: $34,000

    Academic 403b: $2000 (contributed by the academic institution)

    Cash-balance plan: $8000

    Total: $53,000 tax-advantaged cap + $8000 deferred tax-advantaged

     

    Taxable:

    Backdoor Roth (spouse and myself) $11,000

    529 plan: $14,400

    Taxable account: $12,000

     

    Question:

    Is there more tax-advantaged space available?  Since I am technically employed by 3 different entities (PLLC, VA, and academic institution) are there separate 401K limits (eg; 53K in PLLC and 18K in each of the W2 options (VA and academic))?  I looked at WCI's examples for multiple 401Ks but couldn't reason how mine fit.  I have asked the benefits coordinators for the PLLC which oversee contributions from these different entities to make sure we aren't over-contributing, and they said no citing this as their response:

    https://www.irs.gov/Retirement-Plans/How-Much-Salary-Can-You-Defer-if-You%E2%80%99re-Eligible-for-More-than-One-Retirement-Plan

    Many thanks on your thoughts

  • #2




    Long-time lurker here…

    I’ll give you some background and my current breakdown (tax-advantaged and taxable investments).  I am employed at an academic medical center through a PLLC as a self-employed physician.  This is how all academic appointments are arranged.  As part of my job, I am also a physician at the VA health center affiliated with my academic institution.  I receive my VA pay directly from the VA (no pass through the academic facility).

     

    Numbers from last year:

    VA pay: $170,000

    PLLC pay: $145,000 (fluctuates based on collections)

    Academic pay: $23,000 (exists so I can participate in the academic institution’s benefits: health insurance, child tuition reimbursement, etc.  I actually have to pay this salary back pre-tax on my P&L every year)

     

    Current contributions:

    5% TSP with 5% match: $17,000

    PLLC profit-sharing/401K contributions: $34,000

    Academic 403b: $2000 (contributed by the academic institution)

    Cash-balance plan: $8000

    Total: $53,000 tax-advantaged cap + $8000 deferred tax-advantaged

     

    Taxable:

    Backdoor Roth (spouse and myself) $11,000

    529 plan: $14,400

    Taxable account: $12,000

     

    Question:

    Is there more tax-advantaged space available?  Since I am technically employed by 3 different entities (PLLC, VA, and academic institution) are there separate 401K limits (eg; 53K in PLLC and 18K in each of the W2 options (VA and academic))?  I looked at WCI’s examples for multiple 401Ks but couldn’t reason how mine fit.  I have asked the benefits coordinators for the PLLC which oversee contributions from these different entities to make sure we aren’t over-contributing, and they said no citing this as their response:

    https://www.irs.gov/Retirement-Plans/How-Much-Salary-Can-You-Defer-if-You%E2%80%99re-Eligible-for-More-than-One-Retirement-Plan

    Many thanks on your thoughts
    Click to expand...


    You have two limits: $18k is shared among 401k and 403b plans (elective deferrals), and a maximum of $53k is shared by ALL of your 401k and 403b plans (unfortunately).

    http://quantiamd.com/player/ygvmhdmbm?cid=1236

    "There is another important section 415 limit exception: if you have a 403(b) plan and own more than 50% of your practice or business, then the 415 limit for your ‘solo’ 401k or SEP IRA plan will aggregate with the 403(b) limit, and you will only be able to contribute $53k into both the 403(b) and your ‘solo’ 401k/SEP IRA."

    I'm not sure why, this stuff makes zero sense.  So if you remove the 403b, all of a sudden you can have multiple $53k limits for unrelated income.  However, free money is always nice.  And you can most likely make up for that loss by using a solo DB plan in addition to the Cash Balance plan you have already.  Your contribution to a solo DB plan will have to be coordinated with your existing Cash Balance plan, but that's a minor adjustment.  The only limitation is your variable income and age (you want to be at least 35 to make a meaningful contribution to a solo DB plan).  You might also have a combo plan but we have to make sure that the 6% profit sharing does not put you over the top with the $53k limit.  The solo DB plan is also a rather complex plan so you have to be absolutely sure that you can make the contributions for at least 3-5 years.

     
    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


    • #3
      You have two limits: $18k is shared among 401k and 403b plans (elective deferrals), and a maximum of $53k is shared by ALL of your 401k and 403b plans (unfortunately).

      I don't believe the above is a correct interpretation of the interaction of the 403b plan you provided in the direct quote. Yes, a 403b is considered a plan of the participant for the consideration of the 415c limit. So the 403b annual additions should be combined with the individual business retirement contributions of the PLLC, because it is considered the same employer.

      However, the 401k contributions are of separate employers and while that applies to the employee salary deferral limit, it does NOT apply to the 415c limit per employer.

      So there is one $18K employer salary deferral limit across all plans. However, there are two $53K annual addition limits. One for the PLLC 401k and the 403b combined and one for the TSP 401k. If the cash balance plan is a 401a with mandatory contribution this is also separate space.

      Comment


      • #4




        You have two limits: $18k is shared among 401k and 403b plans (elective deferrals), and a maximum of $53k is shared by ALL of your 401k and 403b plans (unfortunately).

        I don’t believe the above is a correct interpretation of the interaction of the 403b plan you provided in the direct quote. Yes, a 403b is considered a plan of the participant for the consideration of the 415c limit. So the 403b annual additions should be combined with the individual business retirement contributions of the PLLC, because it is considered the same employer.

        However, the 401k contributions are of separate employers and while that applies to the employee salary deferral limit, it does NOT apply to the 415c limit per employer.

        So there is one $18K employer salary deferral limit across all plans. However, there are two $53K annual addition limits. One for the PLLC 401k and the 403b combined and one for the TSP 401k. If the cash balance plan is a 401a with mandatory contribution this is also separate space.
        Click to expand...


        Sorry for the confusion, this is a very good point (I believe the following is an IRS quote):

        "Participation in a qualified plan. If you par­ticipated in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pensions of all corporations, partnerships, and sole proprietor­ ships in which you have more than 50% control."

        I'm always thinking in terms of solo 401k/SEP plans, and in most cases entities with a 403b and a 401k plan rarely allow you to max out either plan at $53k. So in some cases it might actually make sense to ditch that 403b plan and contribute your 1099 income into a solo 401k instead, with the salary deferral going into your solo 401k (not your W2 401k) because you can pick the best investments available, while your W2 401k in many cases won't do that.
        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


        • #5
          Thank you both for your thoughtful replies.  I cannot figure out why I can't wrap my mind around this issue.  Perhaps investment paralysis?  If I understand the current train of thought in this post, I can max out my combined PLLC/403b contributions at 53K (b/c they both represent the academic institution) and separately max out my TSP 401K at 53K?  The additional TSP contribution at 53K doesn't make sense to me since this is a W2 job.  I though employee contributions for this could not exceed 18K.

          My question is, if you were me, what is the next step...how would you approach the benefits administrator to convince them that total contributions could exceed my current $53K max across the PLLC (profit sharing with 401k), 403b, and TSP 401K?  What evidence am I armed with to effect this change?  If I could contribute more in this tax-advantaged space, this has the ability to benefit quite a few of my colleagues (assuming they are living below their current means).

          Thanks!

          Comment


          • #6




            Thank you both for your thoughtful replies.  I cannot figure out why I can’t wrap my mind around this issue.  Perhaps investment paralysis?  If I understand the current train of thought in this post, I can max out my combined PLLC/403b contributions at 53K (b/c they both represent the academic institution) and separately max out my TSP 401K at 53K?  The additional TSP contribution at 53K doesn’t make sense to me since this is a W2 job.  I though employee contributions for this could not exceed 18K.

            My question is, if you were me, what is the next step…how would you approach the benefits administrator to convince them that total contributions could exceed my current $53K max across the PLLC (profit sharing with 401k), 403b, and TSP 401K?  What evidence am I armed with to effect this change?  If I could contribute more in this tax-advantaged space, this has the ability to benefit quite a few of my colleagues (assuming they are living below their current means).

            Thanks!
            Click to expand...


            I think because it doesnt make any sense at all.

            Comment


            • #7




              Thank you both for your thoughtful replies.  I cannot figure out why I can’t wrap my mind around this issue.  Perhaps investment paralysis?  If I understand the current train of thought in this post, I can max out my combined PLLC/403b contributions at 53K (b/c they both represent the academic institution) and separately max out my TSP 401K at 53K?  The additional TSP contribution at 53K doesn’t make sense to me since this is a W2 job.  I though employee contributions for this could not exceed 18K.

              My question is, if you were me, what is the next step…how would you approach the benefits administrator to convince them that total contributions could exceed my current $53K max across the PLLC (profit sharing with 401k), 403b, and TSP 401K?  What evidence am I armed with to effect this change?  If I could contribute more in this tax-advantaged space, this has the ability to benefit quite a few of my colleagues (assuming they are living below their current means).

              Thanks!
              Click to expand...


              Exactly, I referred to this above.  So my reply before that had to do with a practical way in which you can avoid the current limitation ($53k for PLLC plus 403b and $53k for your TSP, which for you will be only $18k).  You can NOT contribute any more into your 403b or TSP plan unless your employer contributes for you.  The only thing you have control over is your own PLLC.  So you can open a solo 401k and contribute ~20% of your PLLC's profit, making sure that together with the 403b your contribution does not exceed $53k.   This won't be much at all (about $30k which is not bad), and you probably won't be able to get to $53k this way (so be it).  Or you can have a solo DB plan, but unless you are older (ideally 40+) and your 1099 profit is large, it won't be that much of a contribution (for example, if you are 40 and have a W2 of $140k, your DB contribution will be around $33k, and another $8k or so in profit sharing).  You can never change what your employer does, so concentrate on things you can have full control over.  In your scenario, unless you are older than 40 and have the ability to earn $200k+ in 1099 income, I'd just open a solo 401k and contribute ~20% of your 1099 net profit and call it a day.  Invest the rest after tax and once your income increases you might want to run the numbers again to see whether a DB plan might be worthwhile (your 1099 income would probably have to be well over $300k to make it worth it vs. just doing the solo 401k and fund it with profit sharing only).
              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


              • #8
                I am curious - how do you classify the $23k you pay back to the academic institution on your taxes?

                You are doing a good job saving and it appears you have maxed out the tax-deferred space. In this situation, I recommend prioritizing savings rather than considering a taxable account "inferior". There are many benefits to a taxable account, including lower tax rates on LTCG and dividends, basis, unlimited choice of investments and total flexibility as to use of account funds. If you bump up your SE income in the future, you can move back to tax-deferred space.
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #9
                  If we could back up a little and get some clarifications.

                  First, to restate. There are two basic classification of contributions. These are either employee or employer contributions. Employee salary deferrals are limited to $18K (2016) per employee across all qualified plans combined. Annual additions, which are the sum of employee and employer contributions per related employers are limited to $53K (2016).

                  The VA has no related ownership interests between it and the academic medical center, so its annual addition would be wholly separate. It is not clear what ownership interest the academic medical center has in PLLC. Also, it is not clear whether you are a member of the PLLC or you are a self-employed contractor to the PLLC.

                  From your description, you have made an ~= $8500 employee salary deferral to and received am ~= $8500 employer match from the VA to the TSP. This leaves $9500 is employee salary deferral space and the employer contribution exists in its own $53K space. This impacts no other annual addition space.

                  You describe yourself as self-employed physician. However, is that as a member of the PLLC or as an independent contractor to the PLLC? This difference would be that the 401k would be through the PLLC in the former and you would have a solo 401k in the latter. Also, what are the breakdowns of the $34,000 in contributions as regard to employee salary deferral, employer match, and/or non-elective employer contribution.

                  Also, it appears that the $2,000 403b amount is a non-elective employer contribution. What and through whom are the circumstances of the cash balance contribution.

                  Though technically, you may have additional annual addition space. Others have pointed out that you do not generally have direct control to take advantage of this.

                  The first way is to maximize your employer contributions. Since you only have $18,000 available to you, you should allocate this to where you would receive the great employer match. The TSP provides a 1% non-elective employer contribution plus 100% match on the first 3% of compensation and 50% match on the next 2%. However, if the PLLC is providing a greater match on a higher percent of compensation, you might want to prioritize that first. You generally have no control over a non-elective employer contribution unless you have a solo 401k, in which case your would want to max that.

                  I hesitate to confuse the issue, but there is one other area where you might have control. There is something called after-tax (not Roth) contributions, which if the plan provides for it and in-service rollovers, you can make these after-tax contributions up to the annual addition limit and roll them over to a Roth IRA. The TSP only allows after-tax contributions from tax-exempt combat pay, not for civilian employees, but does not in-service rollovers before 59 1/2. It is possible, but high unlikely that your PLLC income would be eligible for after-tax contributions and in-service rollover to a Roth IRA

                  Comment


                  • #10
                    Thanks for the responses.  Will try to answer a few of the questions posed:

                    1. jofoxcpacfp: I am curious – how do you classify the $23k you pay back to the academic institution on your taxes?

                    The 23K is on my P&L.  It counts the same as collections and then is listed in the expense column to zero out

                    2. spiritrider: You describe yourself as self-employed physician. However, is that as a member of the PLLC or as an independent contractor to the PLLC?

                    I am a member of the PLLC.

                    3. spiritrider: Also, what are the breakdowns of the $34,000 in contributions as regard to employee salary deferral, employer match, and/or non-elective employer contribution.

                    For retirement purposes, I pay both the employee and employer portions.  There is a mandatory 12% contribution to profit sharing.  After that, the remainder is divided 100% employee with 200% employer match to the 401K to reach $34K in total.  Unfortunately, I think this cannibalizes most of the rest of my employee 18K max (since 8.5K was accounted for in the VA TSP employee contribution).

                    4. spiritrider: Also, it appears that the $2,000 403b amount is a non-elective employer contribution. What and through whom are the circumstances of the cash balance contribution.

                    The CBP is set up by the PLLC.  As is typical, contributions are defined by income (in this case my PLLC pay) and age.  $8K was the max for me

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