Husband-Wife Partnership IRA limits

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MedoraLeigh
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Joined: Thu May 18, 2017 2:33 pm

Husband-Wife Partnership IRA limits

Post by MedoraLeigh » Thu May 18, 2017 2:42 pm

Hi,
I'm new to this forum, have searched this topic but not yet found an answer.
My husband and I are over 50; have a been filing as a Husband/Wife Qualified Joint Venture (sole proprietorship with no employees.) Luckily, we're having a good year! We want to make the maximum contributions to our retirement. These would be "catch up" contributions.

I see the limit is 20% of your net SE income--but is that for EACH? i.e. I'd really like to be able to deduct up to the max, but am concerned about the IRS rule that says you can only deduct up to 25% of your total SE income. Am I interpreting this correctly?

We have a small SEP but will be opening new retirement plans -- SEP plus if it helps another type.

Any advice is appreciated.

(Also the urgency to deduct the max is because we're in California, and there's a max Modified AGI of $64,000 in order to get affordable health care. It literally goes from $310/month to $1600/month! I figure I'd rather put that money in our retirement accounts than give it to Blue Shield! :-) :-) )
Thanks!

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Duckie
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Re: Husband-Wife Partnership IRA limits

Post by Duckie » Thu May 18, 2017 4:12 pm

MedoraLeigh, welcome to the forum.
MedoraLeigh wrote:My husband and I are over 50; have a been filing as a Husband/Wife Qualified Joint Venture (sole proprietorship with no employees.)
<snip>
We have a small SEP but will be opening new retirement plans -- SEP plus if it helps another type.
Since you have no employees you can open a solo 401k. That way you can each contribute up to $24K as the employEE (if this is your only employer retirement plan) plus ~20% of net earnings as the employER. (I'm not sure, but I think that ~20% is total, not each.)

Spirit Rider
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Re: Husband-Wife Partnership IRA limits

Post by Spirit Rider » Thu May 18, 2017 6:30 pm

The max employer contribution is 20% of net self-employment income for each of you. You can not each get 20% on the same income. If the business as a whole has $100K (+ a little for 1/2 SE tax) in net business profit such that you each have a pro-rated $50K in net self-employment income (net business profit - 1/2 SE tax), then you can each receive a $10K (20%) employer contribution.

As Duckie said a one-participant 401k would be your best option. You would each be able to make employee deferrals of $24K and an employer contributions of 20%. Unfortunately, if you have made SEP IRA contributions for the 2017 tax year, you can not have a 5305 SEP IRA plan and a one-participant 401k at the same time. Almost all mainstream SEP IRA plans are 5305 SEP plans. This includes Vanguard, Fidelity, etc...

However, Schwab has a prototype SEP IRA plan which can be operated in conjunction with a one-participant 401k. There is a solution that may sound tricky, but in process is not really that difficult. You would amend your SEP IRA to Schwab's prototype plan retroactive to 1/1/17. This is really just an option on their SEP IRA adoption agreement. I'm sure their reps can help you through it. Then you would do a trustee->trustee direct transfer of all the assets.

Then adopt a one-participant 401k, also making the effective date retroactive to 1/1/17. This is necessary to make all of this year's income available to the 401k. There is still only one 20% employer contributions limit between the two plans. The net result is that you each can make employee deferrals of up to $24K and employer contributions up to 20% of your separate self-employment incomes.

MedoraLeigh
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Joined: Thu May 18, 2017 2:33 pm

Re: Husband-Wife Partnership IRA limits

Post by MedoraLeigh » Fri May 19, 2017 1:16 am

Thank you Ducky and SpiritRider for your prompt replies!

I admit to not understanding all the details of your explanation, SpiritRider--yet. I'm digging in and learning! But what I'm hearing is that there are ways to contribute the amount we need to our retirement accounts in order to bring our modified gross income down to $64,000 and keep our affordable health insurance. At least for 2017. Who knows what will happen for 2018? I think we'll switch to an HSA account but that's another thread! :wink:

To clarify, we have not made contributions to our SEP-IRAs since we opened them 10 years ago. They were set up as annuities (which I wish we hadn't done, but this was not explained to me properly at the time.) They're "maturing" this October so I think rolling them into the type of SEP you recommend shouldn't be a problem.

You sound VERY knowledgeable about Qualified Joint Ventures and retirement investment options. Are you in fact a professional consultant? Or can you refer? I hope that's okay to ask on this Forum. If so, I'd welcome a private message. I want to get this right and feel we weren't given proper advice when we set up our SEPs originally.

Thank you both for sharing your knowledge! :-)

Spirit Rider
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Re: Husband-Wife Partnership IRA limits

Post by Spirit Rider » Fri May 19, 2017 9:14 am

No, I am not a professional and like others here, am just a reasonably knowledgeable individual. It is generally better to not use PM's unless necessary. This forum has many willing to help, other eyes help to correct any mistakes and oversights and topics can inform others than the OP..

If you have not made SEP IRA contributions for the 2017 tax year, it is far simpler. Just adopt your one-participant 401k plan, open your two accounts under that plan and make your written employee deferral elections by 12/31/17. You have until your tax filing deadline including extensions to make your employee deferrals and employer contributions. Just make sure the effective date is retroactive to 1/1/17 to allow​ the entire years income to be the basis for the 401k contributions.

It is not necessary to close your SEP IRA. You just cannot make contributions to it after you adopt the 401k. You can leave it alone, roll it over to your 401k, another SEP IRA or even a traditional IRA.

A useful reason for using thread replies is that the choice of one-participant 401k providers is a matter of opinion. Vanguard's Individual 401k; does not accept rollovers or allow their lower expense ratio Admiral class shares, but does offer designated Roth 401k accounts. Fidelity's Self-employed 401k; does allow rollovers, does allow their lower expense ratio Premium class shares, but does not offer designated Roth 401k accounts. TD Ameritrade's Solo 401k; does allow rollovers, does allow commission free trade of many of Vanguard's ETFs with Admiral like expense ratios and does offer designated Roth 401k accounts. Still others prefer Schwab or E-Trade.

MedoraLeigh
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Joined: Thu May 18, 2017 2:33 pm

Re: Husband-Wife Partnership IRA limits

Post by MedoraLeigh » Sat May 20, 2017 4:06 pm

Hi Spirit Rider,
Thank you again, and I will follow your advice of keeping this discussion on the thread.

I admit to not yet understanding the differences between each type of retirement vehicle (don't know my Roth from my 401), but I am researching. I can learn fast if I have access to the info. It's just that my husband and I both came from families that lived paycheck to paycheck, and are only now experiencing the kind of success that we can actually consider saving for our future, and saving on taxes! (We had been at this point in 2008...and, well, you know what happened then! :annoyed ) We've just never really had money to invest before, and never had any guidance on the subject. We're eager to catch up on the learning curve, so thank you, Uncle Spirit Rider! ;-)

As to which brokerage to go with, I think the one with the most flexibility makes sense, such as Ameritrade and yes I've heard that Schwab is good, too. But what's most important to me is a knowledgeable AGENT (is that the correct term?) Anyone can sell you something, but the ADVICE for our particular situation--ie. am over-50 husband/wife business and the tax ramifications of the self-employed--is what is most valuable. An experienced, service-oriented professional is even worth extra fees in my opinion. Are you able to refer? Or point me in the right direction to find such a paragon?

I appreciate it. I'd like to get these accounts set up now, even if we make the investments towards the end of the year when we have a better sense of the annual profit (and what exact amount is left over to invest.) I'm estimating in the $40-50K range if all continues on track. Maybe not a lot to Bogleheads, but huge for us!

Did I say thank you already? Seriously: THANK YOU!! "I've always depended on the kindness of strangers."

JGoneRiding
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Joined: Tue Jul 15, 2014 3:26 pm

Re: Husband-Wife Partnership IRA limits

Post by JGoneRiding » Sat May 20, 2017 8:40 pm

Schwab is really great in that you get Free! Review of your portfolio and they will really wall you through things and don't make any money selling ypu atuff. Plus you can start for as little as 100. And they have the lowest expense ratio of any s&p 500 fund.

Vanguard and fidelity a r e both great too.

I wouldn't do ameritrade personally

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