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  • Help with SEP IRA, 401k decisions

    I've been following the WCI podcast for about 6 months and I have read Dr. Dahle's introductory personal finance book, however I am still having some trouble determining if I am making the best decisions with my retirement accounts. I am hoping that you all could provide some guidance. Here is more about my situation:
    • I am married, 42 years old, and started my medical career late in life. I have paid off all my loans except a mortgage and business loan. My spouse is not currently employed and likely will not be for the coming years.
    • I am a medical specialist in private practice with a staff of 7-8 employees. I own this practice in its entirety and currently do not have a 401k or retirement plan offered to my team. I have looked into a defined benefit plan for my staff and myself and had an actuary run the numbers. I decided to NOT move forward with this for the time being.
    • Additionally, I own another unrelated small business that provides about $30k/year in income. I am the sole owner of this second business.
      • At the direction of my accountant, I have only contributed about $6k/year to a SEP-IRA account through this second business.
      • I have set up a stealth IRA account (hope that is the correct term!) and haven't spent any of the HSA funds for the few years I have been doing that.
    • I have set up a 529 account through my529 in Utah after researching different options.
    • Our total taxable family income is over $300k/yr.
    After reading the forums, books, and listening to the podcast I am still at a loss for what type of retirement accounts I should be setting up and/or investing in. Is the SEP IRA the best account to be putting money into? Can I do a solo 401k or Traditional IRA in addition to, or as an alternative of, the SEP IRA? How much can I contribute considering my personal situation?

    Thank you!

  • #2
    If you are not offering the SEP to the employees of your medical practice, you are not allowed to contribute to one for yourself in the other business. The businesses are considered as one, i.e. aggregated for retirement plan rules. Did you just purchase the new practice this year? No, you cannot do a solo-k, either, for the same reason. You must cover all employees.

    If you have had the side business for several years and contributed to the SEP (a solo-k w/h/b preferable) during that time and just bought the new practice (2019), then you need to look at upgrading to a plan for the whole practice.

    Can you post some more information? How much over $300k is your income? Do you expect much growth in the practice in upcoming years?
    Financial planning, investment management and CPA services for medical professionals | 270-247-6087

    Comment


    • #3
      As pointed out by jfoxcpacfp, you have a controlled group of two businesses. The two businesses are considered one employer for retirement plan purposes. For any year you made employer* contributions to the SEP IRA, you were/are obligated to make employer contributions to any of the 7-8 eligible employees.

      This is a serious violation of a SEP IRA plan operational rules. You need to fix this ASAP. See https://www.irs.gov/retirement-plans...-participating

      *employer is bold above, because it is possible to make traditional IRA contributions to a SEP IRA account. The SEP IRA custodian must allow such contributions and you must designate it as so. I think it is probably unlikely, but I am raising this issue is because the $6K contribution amount is the same as the 2019 IRA contribution limit. If this is the case, then you do not have a problem. Note: In case you were thinking... No once made, you can not recharacterise a SEP IRA contribution as a traditional IRA contribution.
      Last edited by spiritrider; 12-07-2019, 03:11 AM.

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      • #4
        I had a SEP/IRA for similar number of employees prior to retirement. It was the best plan out there at the time prior to backdoor Roths. The problem is you automatically fund your employees at the same percentage of income that you place in there for yourself. This is fine if you love your employees like family but hard to stomach if they pay the penalty and use the money for spending. You can set a longer time period before you cover them say 5 years I think. The nice thing about a SEP is you are not responsible for the employee investment decisions and they have basically no fees.

        Comment


        • #5
          Originally posted by SkiBum View Post
          I've been following the WCI podcast for about 6 months and I have read Dr. Dahle's introductory personal finance book, however I am still having some trouble determining if I am making the best decisions with my retirement accounts. I am hoping that you all could provide some guidance. Here is more about my situation:
          • I am married, 42 years old, and started my medical career late in life. I have paid off all my loans except a mortgage and business loan. My spouse is not currently employed and likely will not be for the coming years.
          • I am a medical specialist in private practice with a staff of 7-8 employees. I own this practice in its entirety and currently do not have a 401k or retirement plan offered to my team. I have looked into a defined benefit plan for my staff and myself and had an actuary run the numbers. I decided to NOT move forward with this for the time being.
          • Additionally, I own another unrelated small business that provides about $30k/year in income. I am the sole owner of this second business.
            • At the direction of my accountant, I have only contributed about $6k/year to a SEP-IRA account through this second business.
            • I have set up a stealth IRA account (hope that is the correct term!) and haven't spent any of the HSA funds for the few years I have been doing that.
          • I have set up a 529 account through my529 in Utah after researching different options.
          • Our total taxable family income is over $300k/yr.
          After reading the forums, books, and listening to the podcast I am still at a loss for what type of retirement accounts I should be setting up and/or investing in. Is the SEP IRA the best account to be putting money into? Can I do a solo 401k or Traditional IRA in addition to, or as an alternative of, the SEP IRA? How much can I contribute considering my personal situation?

          Thank you!
          As mentioned above, you can not exclude the employees of your main practice from your SEP because you form a controlled group. To fix this situation, you have to open your SEP to the eligible staff and make contributions on their behalf during the years when you contributed yourself. This is the only way to fix it (you can not simply pull the money out of the SEP, the IRS will not allow it). This is done via voluntary compliance, and if your CPA told you to do this, they are definitely at fault for giving you bad advice.

          So now you are beginning to see why a 401k is a MUCH better plan than a SEP. With 7-8 employees things might get expensive as far as profit sharing, but if you are in the highest tax brackets and your % to owner is reasonable, this is the money you would be giving away to the government, and you would probably be better off giving it to your staff instead. For a CB plan I would expect at least $500k, possibly $600k if you have a practice with staff at the minimum before recommending a CB plan. I would consider a basic Safe Harbor 401k and possibly profit sharing if the numbers work out in your favor as this is a much better alternative than SEP. Also, your 2nd business can adopt your 401k plan, and you can basically use the money from the 2nd business to bring up your income in case you do want to make profit sharing contributions (usually by allowing you an increase in your W2).

          However with a net of $300k, you might be better off doing a 100% Roth 401k (Roth salary deferral, in-plan Roth conversion for everything else including PS, if the numbers are reasonable) and take advantage of QBI deduction instead (with a lower W2). This is probably a better approach if you expect your net to be under the QBI threshold.

          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


          • #6
            You're numbers are very close to mine so I'll share my plan with you.

            Safe harbor 401k with profit sharing and social security integration. It's a great plan to offer employees and great for you as a HCE. If you include you're wife (and kids) as employee(s) you can easily keep 90% of contributions within your family.

            (Pay your wife enough to max out her 401k and get the match, pay your kids as much as you can legally. I paid my kids enough to fund their Roth IRA's and put their earned income into 529 plan.)

            unless you get into money purchase plans you can't go wrong, it's worked for me.
            Last edited by [email protected]; 12-09-2019, 09:40 PM.
            Hal

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            • #7
              Thank you all for the wonderful feedback. Income is closer to $500k. I think growth will be relatively stagnant. I don't things will change much for better or worse. I did not realize this about "controlled groups". Does it still work that way even if the businesses are totally unrelated? The smaller business with the SEP I started when I was in school and I've had for 10 years. Sounds like I need to talk to my accountant about this.
              Last edited by SkiBum; 12-09-2019, 10:06 PM.

              Comment


              • #8
                To be considered "separate lines of business", exempt from controlled and affiliated service group rules. Both businesses would be required to have a minimum of 50 employees and prior approval granted from the IRS. In your case it does not matter if the businesses are unrelated with the number of employees. They are still a controlled group.

                I would be very surprised if your accountant is well versed in controlled and affiliated service group rules. If you have been contributing to the SEP IRA from a wholly owned business for ten years, you have had a controlled group for as long as you have had the private practice.

                You are on the hook for past employer contributions for all those years and eligible employees. You really need a retirement plan specialist with a thorough understanding of controlled group rules. This is not an issue to be taken lightly.

                Comment


                • #9
                  Well, I am definitely going to take care it. Geesh, I didn’t even know about that. Planning on a call this week to rectify.

                  If I decided I did not want to offer any kind of DBP or 401k to staff, what are my best options for saving?

                  Comment


                  • #10
                    You will have options but they are very limiting. If you want to put away big bucks you need to include the your employees but it's well worth it.
                    Hal

                    Comment


                    • #11
                      Originally posted by SkiBum View Post
                      Well, I am definitely going to take care it. Geesh, I didn’t even know about that. Planning on a call this week to rectify.

                      If I decided I did not want to offer any kind of DBP or 401k to staff, what are my best options for saving?
                      taxable brokerage, IRA/backdoor Roth IRA, maybe HSA, pay off debt

                      you need to get proposals for a safe harbor 401k. It’s basically free and no risk

                      Comment


                      • #12
                        I’ve had an actuary run some numbers for me and they just don’t seem that good for a defined benefit plan. I’m probably forgetting something. Here was my thinking in the picture attached. Basically, I compared putting away $139k/yr to my own pension vs. paying taxes and investing. I assumed 35% taxes if I paid taxes now, investment growth at 6%. However, if I did it costs of $18k/yr (staff contribution plus plan fees, and assume100% participation). And also assume 20% tax rate on withdrawal. Shouldn’t it be better than ~$400k difference after 25 years? (Obviously staff will like it, increased retention, but I’m just looking at numbers).

                        What am I missing here? Are the fees just silly?
                        Last edited by SkiBum; 12-11-2019, 08:22 AM.

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                        • #13
                          42 is a bit young to get any significant benefit from a defined benefit plan. This is especially true depending on your employee census.

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                          • #14
                            Originally posted by SkiBum View Post
                            I’ve had an actuary run some numbers for me and they just don’t seem that good for a defined benefit plan. I’m probably forgetting something. Here was my thinking in the picture attached. Basically, I compared putting away $139k/yr to my own pension vs. paying taxes and investing. I assumed 35% taxes if I paid taxes now, investment growth at 6%. However, if I did it costs of $18k/yr (staff contribution plus plan fees, and assume100% participation). And also assume 20% tax rate on withdrawal. Shouldn’t it be better than ~$400k difference after 25 years? (Obviously staff will like it, increased retention, but I’m just looking at numbers).

                            What am I missing here? Are the fees just silly?
                            This is incorrect analysis. To do it right you have to include opportunity cost of having to pay taxes out of your cash flow (so your tax-deferred bucket is a lot better than what you are showing). I'm writing an WCI post specifically on how to do this correctly. So the numbers might be just fine, but I don't see employer contribution cost here as well and what your % to owner is.

                            However, I can't see how you are in the 35% tax bracket if your taxable income is $300k. You are at best in the 24% federal bracket, unless your state bracket is also around 11%. So I don't see the urgency of investing in a tax-deferred account beyond $57k into your 401k plan (provided the numbers are in your favor). I suspect they are not that great, so a CB plan might rectify things a bit, but I would never do one with such a small net as cash flow is going to be a huge problem if your net is $300k.
                            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


                            • #15
                              Originally posted by [email protected] View Post
                              You will have options but they are very limiting. If you want to put away big bucks you need to include the your employees but it's well worth it.
                              Not necessarily “well worth it”. Depends on facts and circumstances. The knee-jerk advice is usually the pre-tax plan, but it does not always make more financial sense than, say, a taxable account.
                              Financial planning, investment management and CPA services for medical professionals | 270-247-6087

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