I'm a relative newbie at this stuff, so would like to pick you minds:
Bottom line up front: I'm fairly certain no matter if I have only one or both a SEP and/or a Solo 401k set up, the max contribution (for 2014) is $52,000. I'm also certain I can't contribute more than 25% of my wages into either. What I am less certain of is if I could contribute less than 25% into a SEP and less than 25% into a 401k, but with the combined percentage of contributions into BOTH (in total) being greater than 25% (but still less than $52,000.
Details: Based on how much as an employee my yearly wages are, I plan on my company deferring just under $42,000 into a SEP (Any more than this and it would put me over 25% contribution limits).
Would it be legal to non-electively defer an additional $10,000 into a Solo 401(k). This would bring the total contributions to just under $52000.
The percentage of my wages invested in the SEP would be ~24.9% and ~4.5% in the 401k. The total percentage would obviously be greater than 25%.
as a follow on question: where does the employee $17,500 contribution fall into the above? part of the $52,000 cap? part of the 25% cap?
any thoughts? Thanks
I generally agree with Jeremy. The larger question… what are you trying to accomplish? There are other alternatives if you are seeking to improve or maximize tax efficiency. These would include muni’s, income producing real estate, and certain types of leases. There are literally limits on life insurance mechanisms. Captive insurance allows up to $1.2m in tax free transfers.
These can be much more complex than setting up a qualified plan so highly recommend the assistance of a fee-only advisor in conjunction with a tax attorney and a CPA.
Samuel - based on the info you provided, it seems that the Solo 401k will make the most sense. The formula for calculating the max profit-sharing contribution to your Solo 401k is the same as the SEP formula, but the 401k allows the additional employee contribution as well. As such, what you have outlined (max out the SEP and make an employee 401k contribution) is going to have the exact same result as contributing all of those dollars into the Solo 401k. There is no benefit to using both and you can't double-dip by using the same earnings for the SEP and/or profit-sharing contribution.
For what it is worth, it requires about $210,000 of S-Corp earnings to be able to max out the SEP, but only $138,000 to reach the required earnings to max out the Solo 401k. After you reach $210k of earnings, it doesn't matter which you use (assuming you are below age 50. After 50, you can make catch-up contributions to the 401k, but not the SEP). Until your income grows to that level, you will be able to defer more into the 401k.
There are several questions that all require detailed answers. The short answers are:
1) Yes, you can have both a Solo(k) and a SEP plan simultaneously; 2) No, you cannot exceed the $52,000 deferral cap with this approach; 3) The $17,500 employee deferral limit ($18,000 in 2015) applies to the Solo(k) only. SEP plans do not allow employee contributions. 4) The $52,000 cap ($53,000 in 2015) includes employee deferrals, employer matching, employer profit sharing, and a few other items that likely won't apply to your plan. The $6,000 catch up contribution for those age 50 and older does not count toward the cap.
There are some plan designs that could easily maximize your savings, but you'll need to work with an advisor to make sure the details fit the plan. I suggest searching out a local fee-only RIA (or give me a call).
All the best,
Jeremy M. Shafer
Use just a Solo 401k; use Fidelity's; no fees or annual costs besides 7.95 to make a stock purchase; they also have no fee, low internal cost mutual funds. Walk into a local Fidelity office and they will help you.