The White Coat InvestorKeymasterStatus: PhysicianPosts: 3954Joined: 05/13/2011
If your business income qualifies for the 199A deduction, there is a major wrinkle to…well…almost everything in your financial life. Your retirement planning has now been turned on its head such that you may even need a new individual 401(k) and tax-deferred contributions may no longer make sense.
I may be all Roth all the time going forward in my WCI, LLC retirement accounts and all tax-deferred all the time in my partnership retirement accounts! It’s getting really wacky around here.
Tax deferred retirement accounts are less valuable (a lot less valuable) than they used to be because tax deferred contributions are subtracted from qualified business income. For an S corp, it’s only the employer contributions, which makes becoming an S Corp a bit more attractive than it used to be.
Oh man, this thing should have been called the financial planner/tax advisor employment security act.
Critically, the introduction of the Section 199A deduction means that business owners must reevaluate their planning from the ground up, as even “obvious” decisions may need to be altered in light of the new rules. Case in point? Going forward, the Section 199A deduction will dramatically reduce the value of a tax-deductible retirement plan contributions.
This new “deduction-reduction problem” with pre-tax retirement contributions arises from the fact that the Section 199A deduction only applies to qualified business income, which is essentially the profits of a company. But when an S corporation makes an employer contribution to an employer-sponsored retirement plan, that contribution, itself, reduces corporate profits. Thus, there is less profit on which the 199A deduction can potentially apply. The sum of these moving parts is that, for some S corporation owners, a contribution to an employer-sponsored retirement plan will effectively result in a partial deduction, but still subject the entire contribution, plus all future earnings, to income tax upon distribution.
Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011