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Retirement Planning for the owner of an LLC?
By Tom Dunn | December 21, 2008
bmwdriver11 asked:
My wife is starting a new business, an LLC, that is a Psychology private practice. She is the sole owner. She will be employing 1 person who will be doing Psychological testing for her. Unfortunately, due to state requirements, this person is required to be a W2 employee. She will be part-time, likely working 15 or so hours per week. My wife would like to be able to save for retirement. A standard IRA (or Roth IRA) does not allow her to save as much as she would like. We have been pointed into the direction of a SEP IRA. However, if we set it up so that 15% of my Wife’s income goes into the SEP, it looks like we would also have to contribute 15% of the part time W2 employee’s earnings as well? Is that right? Is there a plan that we can set up instead where the employee could participate if she chose, but if she did participate, the money would come out of her earnings? I cant understand why there isnt an option that is more like a 401k available for small businesses!
Emily
My wife is starting a new business, an LLC, that is a Psychology private practice. She is the sole owner. She will be employing 1 person who will be doing Psychological testing for her. Unfortunately, due to state requirements, this person is required to be a W2 employee. She will be part-time, likely working 15 or so hours per week. My wife would like to be able to save for retirement. A standard IRA (or Roth IRA) does not allow her to save as much as she would like. We have been pointed into the direction of a SEP IRA. However, if we set it up so that 15% of my Wife’s income goes into the SEP, it looks like we would also have to contribute 15% of the part time W2 employee’s earnings as well? Is that right? Is there a plan that we can set up instead where the employee could participate if she chose, but if she did participate, the money would come out of her earnings? I cant understand why there isnt an option that is more like a 401k available for small businesses!
Emily
Topics: retirement planning |
December 22nd, 2008 at 4:49 am
If she hasn’t hired the employee yet then she needs to set up a safe harbor 401k with a 3% non elective contribution and a discretionary profit sharing contribution option. Make it effective immediately and make all current employees immediately eligible but all future employees would need to satisfy a year of service requirement. That way the new employee will never be eligible for the 401k but your wife will be. By making it a safe harbor plan she will be able to put in 15,500 (indexed) each year PLUS she can also get 3% of her income as a safe harbor contribution PLUS she can also make a profit sharing contribution up to 20% of her income. She’ll get 100% of it and the employee??? Zero. Plus this allows your wife to put away far more if her income isn’t over 230k. Think about it…If she earns 100k she can do this: 20% of 100k is 20,000 PLUS the 15,000 Plus the 3,000 safe harbor contribtion. So she puts away 38k but with the sep she’d have been limited to 20k. The reason you make it a safe harbor plan? Should the business ever get to the point where the employee becomes eligible (works 1000 hours in a year) then the plan would be subject to discrimination testing the following year and your wife’s cotnributions could be limited. But because you’re a safe harbor plan you take that into consideration. That employee will automatically be entitled to receive the 3% contribution but small price to pay since your wife is realizing tax savings FAR above that. They wouldn’t be eligible for a profit sharing contribution if they didn’t work 1000 hours again but even if they do they have formulas that would allow your wife to put in a huge amount while only contributing an additional 2% to the staff.
this plan is by far the smartest plan she could do…(short of a defined benefit plan) and is perfect for a small business such as hers. When I was doing this stuff my clients were using their tax savings to totally fund the contributions required for the employees. Instead of paying it to Uncle Sam they made their employees happy and they received a huge retirement benefit to boot. This type plan is perfect for a Dr’s office. There is no better. A SEP is old school and an absolute waste of money for exactly the reason you gave. Why give an employee the same level of contribution that your wife gets. The employee has no risk, no skin in the game…they shouldn’t get the same benefit. Only reason to do a SEP is to save money on filing and such. But the tax savings by putting away all that $$ more than makes up for the added expense.
I’ve given you something to think about here…but my real advice is to go to a Third Party Administrator who is completely independent of any insurance company or mutual fund company. Let them handle this for you…it’s worth the time and money. Interview 3 or 4 of them and find one that is honest and upfront with you…Don’t use the cheapest one or the one that promises you all the bells and whistles. Find the one that you feel comfortable with and trust. You will not regret it.