Reduce Taxes With Retirement Plan Contributions
The good news is that your business (except for the sole proprietorship) gets a tax deduction in 2013 but your business does not have to contribute the retirement plan contribution until 9-15-2014 (with a valid extension).
If a third party administration retirement plan firm runs the non-discrimination tests and your business passes these tests, you can get between 50% to 74% of the benefits of the retirement plan dollars! I recommend that the tests are run because without the tests, your business will not be able to get a full deduction for the retirement plan contribution. New comparability, age weighted and cross tested are some of the most common terms used that help the business owner get most of the retirement plan contribution "pie".
With the downsizing of businesses, there are more spouses who are the only employees of a S corporation or C (also known as a regular corporation) and partnerships. Although these small businesses allow 100% of the retirement plan dollars to go to the spouses, there are mistakes that are made.
One common mistake that will result in a 50% "penalty" is overfunding a Solo 401K Profit Sharing Plan. The business owner can avoid this problem by making sure that
Another common error is to show the full payroll in Officers' compensation when the correct amount is the full payroll less the SOLO 401K withheld from the spouses' payrolls.
If the age 50 and over business owners want to achieve the maximum of $56,500 allowed, the business owners may have to increase your payroll. For example if a business owner has total payroll of $83,000, the profit sharing plan contribution would be calculated as follows $83,000 less $23,000 401K withheld from spouse=$60,000 x 25%=$15,000. The grand total allowed would be $38,000 ($23K plus $15K) as compared to the $56,500. Some people get a Solo 401K and profit sharing plan confused. What they have is a SEP IRA which is 100% contributed by the employer. The total maximum limit for a SEP IRA and total would be $51,000 instead of $56,500.
Under the 2013 new Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $51,000, an increase of $1,000 from 2012.
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. That amount can be made in pre-tax or after-tax (Roth).
Under the 2013 new Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $51,000, an increase of $1,000 from 2012.
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $56,500, an increase of $1,000 from 2012.
If a third party administration retirement plan firm runs the non-discrimination tests and your business passes these tests, you can get between 50% to 74% of the benefits of the retirement plan dollars! I recommend that the tests are run because without the tests, your business will not be able to get a full deduction for the retirement plan contribution. New comparability, age weighted and cross tested are some of the most common terms used that help the business owner get most of the retirement plan contribution "pie".
With the downsizing of businesses, there are more spouses who are the only employees of a S corporation or C (also known as a regular corporation) and partnerships. Although these small businesses allow 100% of the retirement plan dollars to go to the spouses, there are mistakes that are made.
One common mistake that will result in a 50% "penalty" is overfunding a Solo 401K Profit Sharing Plan. The business owner can avoid this problem by making sure that
- Only the two spouses are employees and
- Making sure to calculate the 25% of payroll retirement plan contribution rate AFTER already subtracting the $23K maximum allowed for each spouse.
Another common error is to show the full payroll in Officers' compensation when the correct amount is the full payroll less the SOLO 401K withheld from the spouses' payrolls.
If the age 50 and over business owners want to achieve the maximum of $56,500 allowed, the business owners may have to increase your payroll. For example if a business owner has total payroll of $83,000, the profit sharing plan contribution would be calculated as follows $83,000 less $23,000 401K withheld from spouse=$60,000 x 25%=$15,000. The grand total allowed would be $38,000 ($23K plus $15K) as compared to the $56,500. Some people get a Solo 401K and profit sharing plan confused. What they have is a SEP IRA which is 100% contributed by the employer. The total maximum limit for a SEP IRA and total would be $51,000 instead of $56,500.
Under the 2013 new Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $51,000, an increase of $1,000 from 2012.
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. That amount can be made in pre-tax or after-tax (Roth).
Under the 2013 new Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $51,000, an increase of $1,000 from 2012.
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $56,500, an increase of $1,000 from 2012.
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