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Help Uncover All pre-tax deferral options

Home Tax Reduction Help Uncover All pre-tax deferral options

  • Avatar Flapper 
    Participant
    Status: Dentist
    Posts: 34
    Joined: 12/13/2018

    Trying to find all my options to put away money and reduce my taxable income for the year…

    I have a single member LLC S corp where I work as a contract dentist for a private office.  I will make around 225K this year, and have that broken up into my reasonable salary W2 income (70K) and the rest as qualified distributions/dividends.

    I currently have a solo 401K where I max out both employer portion (17.5K done as a Roth per advise from my CPA), and max out my employee portion (19K done as a Traditional tax deferral).  Am I allowed to do this as such? I heard somewhere else that the employer portion has to be pre-tax traditional.

    I also do the backdoor Roth IRA each year.  I want to do more tax deferred savings, but can not find the vehicles to do this.  I heard about doing the SEP IRA, but then I could not do the Roth IRA.  Can I do the SEP IRA and max out the 20% from the employer portion, and then just roll it over to the solo 401k before Dec 31 each year to max this out?

    I can’t do the HSA.  I have heard of UTMA and something else similar for the kids, so I may try this.  Just trying to brainstorm a little here for my specific situation.  Any help is greatly appreciated!

    Thank you!

    #229297 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8363
    Joined: 01/09/2016

    I think you’re letting the tax tail wag the dog. An s-corp does not seem (to me) to be indicated for only $225k of income (but you’ll get a tax deduction for what you’re paying for payroll preparation, bookkeeping, and tax services. Is that your primary goal, or putting more money in your pocket?)

    You cannot contribute to a SEP and a 401k in the same year. Yes, employer 401k profit-sharing is pre-tax. Your CPA needs to do some tax planning with you on the Roth contribution, not sure I agree with him/her. And you can contribute $19k this year.

    UTMAs won’t make any significant different for taxes and can cause more trouble than than solve problems over the long term.

     

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #229304 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2465
    Joined: 03/01/2018

    From limited information I am leery of your accountant’s expertise.

    • 70k salary on 225k gross for a contract dentist seems an unreasonably low salary
    • employer contributions to a qualified plan can only be pre tax, never Roth
    • you could be better off as a sole prop rather than an S corp, considering increased contributions to a qualified plan and likely increased QBI deduction

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #229313 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1973
    Joined: 02/01/2016
    Splash Refinancing Bonus

    I have a single member LLC S corp where I work as a contract dentist for a private office.  I will make around 225K this year, and have that broken up into my reasonable salary W2 income (70K) and the rest as qualified distributions/dividends.

    I find it hard to believe that you can justify only $70K as “reasonable compensation” on $225K in business profits. Also, distributions are NOT qualified dividends, they are taxable as ordinary income.

    IRS guidance and court rulings have specifically and consistently ruled that in businesses where the majority of the gross receipts are generated by the shareholder’s personal services, then the majority of business profits should be classified as wages that are subject to employment taxes.

    I currently have a solo 401K where I max out both employer portion (17.5K done as a Roth per advise from my CPA), and max out my employee portion (19K done as a Traditional tax deferral).  Am I allowed to do this as such? I heard somewhere else that the employer portion has to be pre-tax traditional.

    You need to find a different CPA. As pointed out by @jfoxcpscfp employer contributions MUST be pre-tax and if they also told you that S-Corp distributions were qualified dividends, they are incompetent.

    I also do the backdoor Roth IRA each year.  I want to do more tax deferred savings, but can not find the vehicles to do this.  I heard about doing the SEP IRA, but then I could not do the Roth IRA.  Can I do the SEP IRA and max out the 20% from the employer portion, and then just roll it over to the solo 401k before Dec 31 each year to max this out?

    For an S-Corp, your maximum employee elective contributions contributions are up 100% of your net W-2 compensation (after mandatory deductions, i.e FICA) not to exceed the limit (2019 = $19K) and your maximum pre-tax employer contributions are up to 25% of your W-2 compensation. The two combined can not exceed the annual addition limit (2019 = $56K). Even if you could add an SEP IRA, it would not increase your total contribution space.

    Finally, I totally agree with @jfoxcpacfp. It is totally counter-productive for you to have an S-Corp with < $200K in MFJ taxable income. You are eligible for the Section 199A 20% Qualified Business Income (QBI) deduction. The S-Corp will have a substantially smaller QBI resulting in a substantially smaller QBI deduction.

    Additionally, to answer your specific question. The best way to increase your tax-advantaged retirement plan contributions is to dissolve the S-Corp and then 20% of your self-employment earned income (business profit – 1/2 SE tax) will be more than enough to maximize the full $56K annual addition limit.

    #229323 Reply
    Avatar Flapper 
    Participant
    Status: Dentist
    Posts: 34
    Joined: 12/13/2018

    Thank you all so much for your insight on this.  Sounds like my CPA has led me down the wrong path.  Is there a resource that you know of to link to where I could see how the numbers would play out between S-corp and sol proprietor in terms of what puts more in your pocket at the end of the day while being totally legal and legitimate?  I thought I had done a bunch of research and my CPA advised me that an S-corp was the way to go.  Also, I read on Choose FI website that you can do both solo 401k and a SEP IRA, but I am guessing that is only if your income is under a certain threshold, correct?  Thanks again!

     

    #229539 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4694
    Joined: 01/08/2016

    Dentists make 70K?

    #229547 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8363
    Joined: 01/09/2016
    Is there a resource that you know of to link to where I could see how the numbers would play out between S-corp and sol proprietor in terms of what puts more in your pocket at the end of the day while being totally legal and legitimate?

    Click to expand…

    I don’t know of one. Maybe @spiritrider can run a rough calculation. What state are you in?

    Also, I read on Choose FI website that you can do both solo 401k and a SEP IRA, but I am guessing that is only if your income is under a certain threshold, correct?  Thanks again!

    Click to expand…

    You can do both a solo-k and a SEP IRA…as long as they are in different years. Care to post that link?

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #229558 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2465
    Joined: 03/01/2018

    an employer can not maintain a 5305 SEP IRA and a solo 401k, and most SEP IRAs are 5305 SEP IRAs

    an employer could maintain a prototype SEP IRA and a solo 401k but there are very few instances where this makes any sense and it would not result in any greater amount going into plans than would just a solo 401k. One might do this to be able to make pretax employer contributions to the SEP IRA which could then be converted to Roth. Employee deferral contributions would be made to the solo 401k.

    Schwab is unique in that they offer a prototype SEP IRA that can coexist with a solo 401k.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #229566 Reply
    Liked by Peds
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1973
    Joined: 02/01/2016

    Dentists make 70K?

    Click to expand…

    @peds makes the most important point. Recent court decisions have found that the single most important factor in determining “reasonable compensation” for an S-Corp 2% shareholder-employee. Is a comparative salary a dentist with your knowledge, skills and experience in your COL area would receive in salary.

    Unfortunately, many CPAs (WCI community excepted) are lazy and not up to date on the recent trends in court decisions, IRS guidance and enforcement and most importantly the new Section 199A QBI deduction. We have seen far too many cases where CPAs have advised physicians, dentists and health professionals to create S-Corps when it was not in their best interests.

    #229593 Reply
    Liked by Hank, Peds
    Avatar Flapper 
    Participant
    Status: Dentist
    Posts: 34
    Joined: 12/13/2018

    Thank you spiritrider. Was wondering what you may advise given my situation of having the approximate income of 200-225K when the goal is to have as much left over after taxes as possible while putting as much away in tax deferred plans as possible.  I am 37 and really want to retire early.  Now I am at a 34% savings rate and may be able to reach FI by age 53.  I want to shorten this even further if possible.

    Of course, I could switch everything up to become an owner and make double what I make now (with tons more debt and potential stress), but I am wanting to see what things may look like to optimize the path that I am currently at (ie… income cap at 225K).

    Is it an S-corp with wages at 80K, 100K, or 150K?  Sole proprietor and take is all as wages? There are too many moving parts to get a clear cut answer.  Ex is that if all you want to make out is the QBI deduction then you take the lowest reasonable salary, but then you can max out the 401K.  Is there a spreadsheet where these numbers can be inputted to find the happy middle ground?

    Anyone else care to share your thoughts?

    Thank you again!

    #234624 Reply
    Avatar Flapper 
    Participant
    Status: Dentist
    Posts: 34
    Joined: 12/13/2018

    typos… if you want to max out QBI  by lowering the wages, then you can’t max out the 401k…

     

    #234637 Reply

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