Physician with salary/401k question

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RRA
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Physician with salary/401k question

Post by RRA » Sun Jul 05, 2015 8:07 pm

I am a physician who works in a private practice group. All of the physicians in the practice formed their own S corp. As such, I am the sole owner and employee of my corporation. The practice itself is also a corp. As a practice, we contract with hospital(s) to provide services. Recently, within the past year, the practice now has employees and started a group 401(k) plan. We decided on a 401(k) Safe Harbor plan with 3% non-elective contribution and profit sharing to maximize the amount of pre-tax money the partners can invest (53,000). The practice entity contributes to the employees' 401(k) accounts. For 2015, I will max out my personal contribution as an employee (18,000). All of the employer non-elective contribution and profit sharing will come from my S Corp to me as the sole employee. The practice as an entity does not contribute to my 401(k). This may be a basic question, but is it better to pay myself a higher salary to maximize my 401k contributions and have less "profit" in my S corp (which I currently do). Or should I take a lower salary, not maximize my contributions but have more money in my S-corp taxed at a lower rate, and invest the difference in a taxable account? Thanks in advance for replying!

EMDW
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Re: Physician with salary/401k question

Post by EMDW » Sun Jul 05, 2015 8:42 pm


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JonnyDVM
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Re: Physician with salary/401k question

Post by JonnyDVM » Sun Jul 05, 2015 9:53 pm

Check out WCI but I believe the answer is you definitely want to be paying yourself enough to max out the 401k. At a high income level it's beneficial to max out all available tax advantaged space. WC recommends you pay yourself a minimum of 50% of your income as salary. At the very least pay yourself enough to max out SS tax.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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BolderBoy
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Re: Physician with salary/401k question

Post by BolderBoy » Sun Jul 05, 2015 10:38 pm

RRA wrote:I am a physician who works in a private practice group. All of the physicians in the practice formed their own S corp. As such, I am the sole owner and employee of my corporation. The practice itself is also a corp. As a practice, we contract with hospital(s) to provide services. Recently, within the past year, the practice now has employees and started a group 401(k) plan. We decided on a 401(k) Safe Harbor plan with 3% non-elective contribution and profit sharing to maximize the amount of pre-tax money the partners can invest (53,000). The practice entity contributes to the employees' 401(k) accounts. For 2015, I will max out my personal contribution as an employee (18,000). All of the employer non-elective contribution and profit sharing will come from my S Corp to me as the sole employee. The practice as an entity does not contribute to my 401(k). This may be a basic question, but is it better to pay myself a higher salary to maximize my 401k contributions and have less "profit" in my S corp (which I currently do). Or should I take a lower salary, not maximize my contributions but have more money in my S-corp taxed at a lower rate, and invest the difference in a taxable account? Thanks in advance for replying!
Perhaps I'm confused. There are two 401k plans in play here, is that right? The "group" 401k, which you are maxing out to the $53k level as an employee of the "group", and your S-Corp 401k to which only the S-Corp employer can contribute since you've done your salary deferral in the "group" 401k, right? So the income from the group to you as an employee of the group is limited to whatever it takes to get to the $53k 401k contribution level and any income above that is passed through to your S-Corp and available to you there as the S-Corp's employee.

Have I got that right? It is very clever.

In the grand scheme of things, with enough years going forward, the $53k contributed each year (which income level also exceeds the SS wage base by a large number) would probably be enough to have a tidy retirement nest egg depending on when you retire and the S-Corp's 401k plan would be superfluous. But, if it were me in your shoes, I'd be maxing out the S-Corp's employer contribution to that 401k as well, because that is just me.

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RRA
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Re: Physician with salary/401k question

Post by RRA » Mon Jul 06, 2015 12:31 am

Thanks, for the link! The comment section proved slightly more informative than the article.

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RRA
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Re: Physician with salary/401k question

Post by RRA » Mon Jul 06, 2015 12:56 am

BolderBoy wrote:
RRA wrote:I am a physician who works in a private practice group. All of the physicians in the practice formed their own S corp. As such, I am the sole owner and employee of my corporation. The practice itself is also a corp. As a practice, we contract with hospital(s) to provide services. Recently, within the past year, the practice now has employees and started a group 401(k) plan. We decided on a 401(k) Safe Harbor plan with 3% non-elective contribution and profit sharing to maximize the amount of pre-tax money the partners can invest (53,000). The practice entity contributes to the employees' 401(k) accounts. For 2015, I will max out my personal contribution as an employee (18,000). All of the employer non-elective contribution and profit sharing will come from my S Corp to me as the sole employee. The practice as an entity does not contribute to my 401(k). This may be a basic question, but is it better to pay myself a higher salary to maximize my 401k contributions and have less "profit" in my S corp (which I currently do). Or should I take a lower salary, not maximize my contributions but have more money in my S-corp taxed at a lower rate, and invest the difference in a taxable account? Thanks in advance for replying!
Perhaps I'm confused. There are two 401k plans in play here, is that right? The "group" 401k, which you are maxing out to the $53k level as an employee of the "group", and your S-Corp 401k to which only the S-Corp employer can contribute since you've done your salary deferral in the "group" 401k, right? So the income from the group to you as an employee of the group is limited to whatever it takes to get to the $53k 401k contribution level and any income above that is passed through to your S-Corp and available to you there as the S-Corp's employee.

Have I got that right? It is very clever.

In the grand scheme of things, with enough years going forward, the $53k contributed each year (which income level also exceeds the SS wage base by a large number) would probably be enough to have a tidy retirement nest egg depending on when you retire and the S-Corp's 401k plan would be superfluous. But, if it were me in your shoes, I'd be maxing out the S-Corp's employer contribution to that 401k as well, because that is just me.
There is only the one 401k used for both employers and employees. For our group practice, I am only an employer, not an employee of the practice. I am only an employee under my personal S-Corp. I'm not sure your scenario is allowable. Please correct me if I am wrong, I think I need a separate, 2nd income source in order to have 2 separate 401(k)'s.

toofache32
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Re: Physician with salary/401k question

Post by toofache32 » Mon Jul 06, 2015 8:08 am

RRA wrote:
BolderBoy wrote:
RRA wrote:I am a physician who works in a private practice group. All of the physicians in the practice formed their own S corp. As such, I am the sole owner and employee of my corporation. The practice itself is also a corp. As a practice, we contract with hospital(s) to provide services. Recently, within the past year, the practice now has employees and started a group 401(k) plan. We decided on a 401(k) Safe Harbor plan with 3% non-elective contribution and profit sharing to maximize the amount of pre-tax money the partners can invest (53,000). The practice entity contributes to the employees' 401(k) accounts. For 2015, I will max out my personal contribution as an employee (18,000). All of the employer non-elective contribution and profit sharing will come from my S Corp to me as the sole employee. The practice as an entity does not contribute to my 401(k). This may be a basic question, but is it better to pay myself a higher salary to maximize my 401k contributions and have less "profit" in my S corp (which I currently do). Or should I take a lower salary, not maximize my contributions but have more money in my S-corp taxed at a lower rate, and invest the difference in a taxable account? Thanks in advance for replying!
Perhaps I'm confused. There are two 401k plans in play here, is that right? The "group" 401k, which you are maxing out to the $53k level as an employee of the "group", and your S-Corp 401k to which only the S-Corp employer can contribute since you've done your salary deferral in the "group" 401k, right? So the income from the group to you as an employee of the group is limited to whatever it takes to get to the $53k 401k contribution level and any income above that is passed through to your S-Corp and available to you there as the S-Corp's employee.

Have I got that right? It is very clever.

In the grand scheme of things, with enough years going forward, the $53k contributed each year (which income level also exceeds the SS wage base by a large number) would probably be enough to have a tidy retirement nest egg depending on when you retire and the S-Corp's 401k plan would be superfluous. But, if it were me in your shoes, I'd be maxing out the S-Corp's employer contribution to that 401k as well, because that is just me.
There is only the one 401k used for both employers and employees. For our group practice, I am only an employer, not an employee of the practice. I am only an employee under my personal S-Corp. I'm not sure your scenario is allowable. Please correct me if I am wrong, I think I need a separate, 2nd income source in order to have 2 separate 401(k)'s.
I have a practice with 3 other docs and we do the same thing. We each have our own PLLC taxed as S-Corp which is contracted to the practice PLLC. To answer your original question, my understanding is that there is no advantage to leaving money in your personal S-Corp since the taxes "flow through" to you and all the money is taxed the same by either your K-1 or your personal return. There used to be a difference in the way money was taxed (either salary or distributions) where you could avoid FICA on distributions, but I think the gap has closed pretty narrow over recent years so separating salary and distributions may not be as advantageous. I could be completely wrong though.

artgerst
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Re: Physician with salary/401k question

Post by artgerst » Mon Jul 06, 2015 4:08 pm

I am a bit confused by your scenario based on the following items I know to be true:

1) You can have multiple 401k accounts but the sum cannot be greater than the federal max (this year $18,000).
2) #1 can be higher with a safe harbor plan BUT there is a max income amount to base the contribution (this year it's $265,000 - so at 3% the max amount is $7950) - therefore the total 401k amount you can have (at least given what you've said) is $25,950

I don't understand how you can get more (deferred) as you mentioned?

EDIT: Sorry my fault - I just reread and never noticed the "profit sharing" statement. So the total amount from either you or any other entity is $53k?

I agree with toofache32 - based on a "reasonable salary" (paid to the employee in an S-Corp) there should be no difference from a tax perspective.

SGM
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Re: Physician with salary/401k question

Post by SGM » Mon Jul 06, 2015 8:12 pm

You need to pay yourself a salary that is reasonable for someone in your specialty. I would put the 18K in the group plan 401K. There is greater protection in a group plan from law suits. You might consider not using that plan if there are poor choices with high ERs. I would likely fill the balance of 53K-18K in your solo 401K as yourself as an employer contribution. So I always paid myself enough to meet the maximum for profit sharing when I could. Consider hiring your spouse for record keeping if married for contributions to the solo 401k as profit sharing or the 18K if spouse is not covered by another plan. I would also do a back door Roth IRA. Consider a solo 401K that allows Roth and pre tax contributions for more flexibility.

At the very least I would meet the SS maximum salary of $118,501 for 2015.

Note that once you have 250K in a solo 401K you have to fill out a 5500 EZ form. That information is accessible by the public. Most plans allow you to make in service direct rollovers to an IRA to keep the amount below 250K.

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BolderBoy
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Re: Physician with salary/401k question

Post by BolderBoy » Tue Jul 07, 2015 1:12 pm

SGM wrote:Note that once you have 250K in a solo 401K you have to fill out a 5500 EZ form. That information is accessible by the public.
Yes it is accessible, but a change was made to make it tougher for "the public" to find. The public has to know exactly what they are looking for in sufficient detail for the specific info to be returned. That was a welcome change from the wide-open accessibility that existed before.

SGM
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Re: Physician with salary/401k question

Post by SGM » Tue Jul 07, 2015 6:25 pm

BolderBoy wrote:
SGM wrote:Note that once you have 250K in a solo 401K you have to fill out a 5500 EZ form. That information is accessible by the public.
Yes it is accessible, but a change was made to make it tougher for "the public" to find. The public has to know exactly what they are looking for in sufficient detail for the specific info to be returned. That was a welcome change from the wide-open accessibility that existed before.
That is good news. I am now retired and no longer have a solo 401K.

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