S corp - 401K plan - profit sharing

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gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Tue Mar 21, 2017 10:39 am

Ethelred wrote:
gilgamesh wrote:Id love to know what you find out with T Rowe Price. I've had funds in my IRA with them before and it's an excellent company. If all I need is low cost index funds, they could be a great choice, especially if they are not charging any fees.
I'm not sure I'd class their index funds as "low cost", at least not compared to Vanguard/Fidelity/Schwab. The net ER on investor class index funds starts at 0.25% for S&P500, and rises pretty quickly. Only three US stock funds have ER below 0.64%. For a 401k of, say, $50k, that's $125/year and $320/year respectively. There are much worse fees out there, but that is already more than guideline's charges per employee plus their mean fund ER, even if you assume there are no other fees at TRP.
Good point!

gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Wed Mar 22, 2017 4:59 am

ERISA Stone wrote:
gilgamesh wrote:
Can you tell me how much in fees you are paying for 401K? Total cost...there's lots of 'hidden' costs with 401k.
He indicated he is with Employee Fiduciary. Their cost is $1500 annually, plus $30/participant if over 30 participants. There is also a .08% basis fee that is paid to the custodian. If he has a new comparability profit sharing contribution allocation method, that costs $750 if he requests it to be processed. There are no "hidden" fees with EF.
I assume I can write off the $30 and the $1500 right? So, if my combined federal, state tax is ~35%, it's effectively $975 and $19.50 correct?

Say if the 3% match is $6k. Could I take 35% off of that too plus (half of FICA tax - 7.65%) I pay?

so, with 5 employees my cost is is $1072.5 + match of $1720.50 for a total of $2793?

I am sure my calculation of match is wrong. Can I take out 7.65% and then separately another 35%?

Thanks!

investor999
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Re: S corp - 401K plan - profit sharing

Post by investor999 » Wed Mar 22, 2017 7:23 am

gilgamesh wrote:
ERISA Stone wrote:
gilgamesh wrote:
Can you tell me how much in fees you are paying for 401K? Total cost...there's lots of 'hidden' costs with 401k.
He indicated he is with Employee Fiduciary. Their cost is $1500 annually, plus $30/participant if over 30 participants. There is also a .08% basis fee that is paid to the custodian. If he has a new comparability profit sharing contribution allocation method, that costs $750 if he requests it to be processed. There are no "hidden" fees with EF.
I assume I can write off the $30 and the $1500 right? So, if my combined federal, state tax is ~35%, it's effectively $975 and $19.50 correct?

Say if the 3% match is $6k. Could I take 35% off of that too plus (half of FICA tax - 7.65%) I pay?

so, with 5 employees my cost is is $1072.5 + match of $1720.50 for a total of $2793?

I am sure my calculation of match is wrong. Can I take out 7.65% and then separately another 35%?

Thanks!
There is also a tax credit of up to $500 per year for the first 3 years for Plan administration costs.

To my knowledge Employee deferrals are subject to FICA. Employer Match is not subject to FICA.

The Employer doesn't save the income tax, the employee defers it.

Spirit Rider
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Re: S corp - 401K plan - profit sharing

Post by Spirit Rider » Wed Mar 22, 2017 8:11 am

investor999 wrote:To my knowledge Employee deferrals are subject to FICA. Employer Match is not subject to FICA.
Correct.
The Employer doesn't save the income tax, the employee defers it.
Employee deferrals are pre-tax to the employee, but the employer contributions are deductable by the employer.

smitcat
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Re: S corp - 401K plan - profit sharing

Post by smitcat » Wed Mar 22, 2017 9:02 am

Please check with your accountant but here is some feedback.....

"I assume I can write off the $30 and the $1500 right? So, if my combined federal, state tax is ~35%, it's effectively $975 and $19.50 correct?
Yes - wish my taxes were at that level.

"Say if the 3% match is $6k. Could I take 35% off of that too plus (half of FICA tax - 7.65%) I pay?"
Matching funds become a business expense which reduces taxable income at the highest marginal rate. The funds go into employee accounts pre tax.

smitcat
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Re: S corp - 401K plan - profit sharing

Post by smitcat » Wed Mar 22, 2017 9:10 am

An excellent point raised by Ethelred....

"I'm not sure I'd class their index funds as "low cost", at least not compared to Vanguard/Fidelity/Schwab. The net ER on investor class index funds starts at 0.25% for S&P500, and rises pretty quickly. Only three US stock funds have ER below 0.64%. For a 401k of, say, $50k, that's $125/year and $320/year respectively. There are much worse fees out there, but that is already more than guideline's charges per employee plus their mean fund ER, even if you assume there are no other fees at TRP."

Typical - Our last 401K provider had very low yearly plan costs and reduced 'company' costs.
But as clearly pointed out above the fees on the available investing funds were well above the lower cost providers. So when you factor that in we were actually much higher costs on the 'low cost' plan due to the costs within the funds.
As a result of that we had lower performance within the funds where we really wanted no cost friction and little or no costs on the plan side where those minimal costs will be a business cost subject to a tax offset.
At say $500,000 of invested accounts with say 0.5% 'extra' fund costs you have $2,500 - ours was actually worse than that 2 years back and now our funds under management are about twice that so it would just magnify the problem(s).
That is why I keep posting about "all costs" and not just the ones they want to lead you towards.

gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Wed Mar 22, 2017 9:39 am

smitcat wrote:Please check with your accountant but here is some feedback.....

"I assume I can write off the $30 and the $1500 right? So, if my combined federal, state tax is ~35%, it's effectively $975 and $19.50 correct?
Yes - wish my taxes were at that level.

That's good. Ohio tax is estimated to me 2%.

"Say if the 3% match is $6k. Could I take 35% off of that too plus (half of FICA tax - 7.65%) I pay?"
Matching funds become a business expense which reduces taxable income at the highest marginal rate. The funds go into employee accounts pre tax.

My match should have said $3k, if so is the rest of my calculations correct? Do I deduct my max tax rate from the whole $3k and then the 7.65% is deducted from the whole $3k again?


gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Wed Mar 22, 2017 9:41 am

smitcat wrote:An excellent point raised by Ethelred....

"I'm not sure I'd class their index funds as "low cost", at least not compared to Vanguard/Fidelity/Schwab. The net ER on investor class index funds starts at 0.25% for S&P500, and rises pretty quickly. Only three US stock funds have ER below 0.64%. For a 401k of, say, $50k, that's $125/year and $320/year respectively. There are much worse fees out there, but that is already more than guideline's charges per employee plus their mean fund ER, even if you assume there are no other fees at TRP."

Typical - Our last 401K provider had very low yearly plan costs and reduced 'company' costs.
But as clearly pointed out above the fees on the available investing funds were well above the lower cost providers. So when you factor that in we were actually much higher costs on the 'low cost' plan due to the costs within the funds.
As a result of that we had lower performance within the funds where we really wanted no cost friction and little or no costs on the plan side where those minimal costs will be a business cost subject to a tax offset.
At say $500,000 of invested accounts with say 0.5% 'extra' fund costs you have $2,500 - ours was actually worse than that 2 years back and now our funds under management are about twice that so it would just magnify the problem(s).
That is why I keep posting about "all costs" and not just the ones they want to lead you towards.

Yes! but that's for T Rowe Price. Guideline.com has impressive low cost admiral shares.

Guideline confirmed I cannot roll my IRA into 401k to do backdoor Roth. Other than, the potential to go bankrupt is the only negatives. But, they grew from $120k AUM id Dec2015 to over $50M now. Isn't it typical for a company not to make a profit at this stage.

Does EF offer to roll over existing IRA's ?

gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Wed Mar 22, 2017 9:44 am

Spirit Rider wrote:
investor999 wrote:To my knowledge Employee deferrals are subject to FICA. Employer Match is not subject to FICA.
Correct.
The Employer doesn't save the income tax, the employee defers it.
Employee deferrals are pre-tax to the employee, but the employer contributions are deductable by the employer.
So, as the employer,that means I save the half of FICA amount on both the employee deferrals and match, right?

smitcat
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Re: S corp - 401K plan - profit sharing

Post by smitcat » Wed Mar 22, 2017 10:41 am

"Guideline confirmed I cannot roll my IRA into 401k to do backdoor Roth. Other than, the potential to go bankrupt is the only negatives. But, they grew from $120k AUM id Dec2015 to over $50M now. Isn't it typical for a company not to make a profit at this stage.
Does EF offer to roll over existing IRA's ?"

I believe either company would be able to do what we needed a number of years back to do the Roth.
Let me see if I remember this correctly....
We had funds mixed in our past mega corp 401k's - which were rolled into IRA's both pre and post tax.
We started our new company 401K which allowed funds to be added.
We moved only the tax deferred funds into our new 401k plan which left the post tax past IRA amounts.
We then moved the post tax IRA accounts to a new vanguard Roth IRA.
Of course we had all the forms required identifying and showing the pre and post tax contributions over the years.
Without the current 401K plan we could not roll the tax deferred out and so could not do the large Roth's.

smitcat
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Re: S corp - 401K plan - profit sharing

Post by smitcat » Wed Mar 22, 2017 10:46 am

"Yes! but that's for T Rowe Price. Guideline.com has impressive low cost admiral shares."

As long as you can get the exact funds you want - and the number of funds that that you want - then you can calculate your simulated expenses and see if they fit.
If all that is good and you feel the risk is reasonable then go for it - I am not researching Guideline at all or doing any comparison. I am just reading these posts about them which appear confusing at times.
IMHO - finding the lowest fees and not getting what you want for you and your employees is not the best move. If you get what you wanted and the fees are low then its a great fit.

Spirit Rider
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Re: S corp - 401K plan - profit sharing

Post by Spirit Rider » Wed Mar 22, 2017 11:05 am

gilgamesh wrote:
Spirit Rider wrote:
investor999 wrote:To my knowledge Employee deferrals are subject to FICA. Employer Match is not subject to FICA.
Correct.
The Employer doesn't save the income tax, the employee defers it.
Employee deferrals are pre-tax to the employee, but the employer contributions are deductable by the employer.
So, as the employer,that means I save the half of FICA amount on both the employee deferrals and match, right?
No.

Employee deferrals reduces the amount of employee compensation reported in W-2 Box 1 (Wages) subject to income taxes, but not Boxes 3 (Social Security Wages) and 5 (Medicare Wages) subject to FICA (including the employer's share).

Employer contributions are deductable expenses against business income, reducing income taxes.. Whether that saves you SE taxes/FICA taxes is determined by whether you are self-employed (yes) or a not (maybe). If you are a corporation, it depends where the money would have gone if you were not making the employer contributions. If it would have gone to your own W-2 compensation, you would save. If not, it wouldn't have been subject to FICA anyways.

ERISA Stone
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Re: S corp - 401K plan - profit sharing

Post by ERISA Stone » Wed Mar 22, 2017 11:15 am

If I had to guess, Guideline's assets increased because of their partnerships. For example, if you choose Gusto as a payroll provider and would also like a low-cost 401k provider, you are sent directly to Guideline. I'm sure they have similar arrangements with other companies. This is good exposure.

As far as hidden costs go, the funds I chose at EF have the same expense ratio that is listed on the Vanguard website.

investor999
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Re: S corp - 401K plan - profit sharing

Post by investor999 » Wed Mar 22, 2017 11:29 am

Spirit Rider wrote:
gilgamesh wrote:
Spirit Rider wrote:
investor999 wrote:To my knowledge Employee deferrals are subject to FICA. Employer Match is not subject to FICA.
Correct.
The Employer doesn't save the income tax, the employee defers it.
Employee deferrals are pre-tax to the employee, but the employer contributions are deductable by the employer.
So, as the employer,that means I save the half of FICA amount on both the employee deferrals and match, right?
No.

Employee deferrals reduces the amount of employee compensation reported in W-2 Box 1 (Wages) subject to income taxes, but not Boxes 3 (Social Security Wages) and 5 (Medicare Wages) subject to FICA (including the employer's share).

Employer contributions are deductable expenses against business income, reducing income taxes.. Whether that saves you SE taxes/FICA taxes is determined by whether you are self-employed (yes) or a not (maybe). If you are a corporation, it depends where the money would have gone if you were not making the employer contributions. If it would have gone to your own W-2 compensation, you would save. If not, it wouldn't have been subject to FICA anyways.
In my case since I am a pass through S-Corp the contributions reduce my business income and save me FICA on that amount.

If I was an LLC, I'd pay the SE Tax anyway. This is why many small businesses with a profit take the S-Corp Election.

gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Wed Mar 22, 2017 11:56 am

smitcat wrote:"Guideline confirmed I cannot roll my IRA into 401k to do backdoor Roth. Other than, the potential to go bankrupt is the only negatives. But, they grew from $120k AUM id Dec2015 to over $50M now. Isn't it typical for a company not to make a profit at this stage.
Does EF offer to roll over existing IRA's ?"

I believe either company would be able to do what we needed a number of years back to do the Roth.
Let me see if I remember this correctly....
We had funds mixed in our past mega corp 401k's - which were rolled into IRA's both pre and post tax.
We started our new company 401K which allowed funds to be added.
We moved only the tax deferred funds into our new 401k plan which left the post tax past IRA amounts.
We then moved the post tax IRA accounts to a new vanguard Roth IRA.
Of course we had all the forms required identifying and showing the pre and post tax contributions over the years.
Without the current 401K plan we could not roll the tax deferred out and so could not do the large Roth's.
I confirmed directly with guideline.com and they said they cannot do it...specifically said I cannot do backdoor Roth.

gilgamesh
Posts: 861
Joined: Sun Jan 10, 2016 9:29 am

Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Wed Mar 22, 2017 11:57 am

Spirit Rider wrote:
gilgamesh wrote:
Spirit Rider wrote:
investor999 wrote:To my knowledge Employee deferrals are subject to FICA. Employer Match is not subject to FICA.
Correct.
The Employer doesn't save the income tax, the employee defers it.
Employee deferrals are pre-tax to the employee, but the employer contributions are deductable by the employer.
So, as the employer,that means I save the half of FICA amount on both the employee deferrals and match, right?
No.

Employee deferrals reduces the amount of employee compensation reported in W-2 Box 1 (Wages) subject to income taxes, but not Boxes 3 (Social Security Wages) and 5 (Medicare Wages) subject to FICA (including the employer's share).

Employer contributions are deductable expenses against business income, reducing income taxes.. Whether that saves you SE taxes/FICA taxes is determined by whether you are self-employed (yes) or a not (maybe). If you are a corporation, it depends where the money would have gone if you were not making the employer contributions. If it would have gone to your own W-2 compensation, you would save. If not, it wouldn't have been subject to FICA anyways.
Thank you! very helpful

gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Wed Mar 22, 2017 12:06 pm

ERISA Stone wrote:If I had to guess, Guideline's assets increased because of their partnerships. For example, if you choose Gusto as a payroll provider and would also like a low-cost 401k provider, you are sent directly to Guideline. I'm sure they have similar arrangements with other companies. This is good exposure.

As far as hidden costs go, the funds I chose at EF have the same expense ratio that is listed on the Vanguard website.
I think I would be spending after-tax about $1k more to go with EF. That's not a lot to go with a company with a proven record. Then there's the 0.08% vs 0.03% AUM fee to consider too.

gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Wed Mar 22, 2017 12:07 pm

investor999 wrote:
Spirit Rider wrote:
gilgamesh wrote:
Spirit Rider wrote:
investor999 wrote:To my knowledge Employee deferrals are subject to FICA. Employer Match is not subject to FICA.
Correct.
The Employer doesn't save the income tax, the employee defers it.
Employee deferrals are pre-tax to the employee, but the employer contributions are deductable by the employer.
So, as the employer,that means I save the half of FICA amount on both the employee deferrals and match, right?
No.

Employee deferrals reduces the amount of employee compensation reported in W-2 Box 1 (Wages) subject to income taxes, but not Boxes 3 (Social Security Wages) and 5 (Medicare Wages) subject to FICA (including the employer's share).

Employer contributions are deductable expenses against business income, reducing income taxes.. Whether that saves you SE taxes/FICA taxes is determined by whether you are self-employed (yes) or a not (maybe). If you are a corporation, it depends where the money would have gone if you were not making the employer contributions. If it would have gone to your own W-2 compensation, you would save. If not, it wouldn't have been subject to FICA anyways.
In my case since I am a pass through S-Corp the contributions reduce my business income and save me FICA on that amount.

If I was an LLC, I'd pay the SE Tax anyway. This is why many small businesses with a profit take the S-Corp Election.
That's good to know...my accountant finally agreed and filed the paperwork to be taxed as an S-corp.

Spirit Rider
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Re: S corp - 401K plan - profit sharing

Post by Spirit Rider » Wed Mar 22, 2017 12:16 pm

investor999 wrote:In my case since I am a pass through S-Corp the contributions reduce my business income and save me FICA on that amount.
If that business income you used for the employer contributions would have been allocated to a distribution, it wouldn't have been subject to FICA to begin with. You can't save what you wouldn't have paid. If you would have used that business income to pay yourself more W-2 compensation, then yes you would have saved FICA.

If I was an LLC, I'd pay the SE Tax anyway. This is why many small businesses with a profit take the S-Corp Election.[/quote]
An LCC is not a tax status since LLCs can also elect sub chapter S status or not. If you are self-employed (LLC or not) employer contributions to employees would reduce your net business profit which would reduce your SE taxes.

To elect sub chapter S status is a rather complex decision. There are far more unwise S-Corp elections than there are self-employed who would be better off with the election. The "all small business owners should at least form an LLC and most should elect sub chapter S status" are myths. Some small business owners should form LLCs and/or some should elect sub chapter S status, but the determination is always based on the specifics of the particular personal/business circumstances.

investor999
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Re: S corp - 401K plan - profit sharing

Post by investor999 » Wed Mar 22, 2017 1:51 pm

Spirit Rider wrote:
investor999 wrote:In my case since I am a pass through S-Corp the contributions reduce my business income and save me FICA on that amount.
If that business income you used for the employer contributions would have been allocated to a distribution, it wouldn't have been subject to FICA to begin with. You can't save what you wouldn't have paid. If you would have used that business income to pay yourself more W-2 compensation, then yes you would have saved FICA.

If I was an LLC, I'd pay the SE Tax anyway. This is why many small businesses with a profit take the S-Corp Election.
An LCC is not a tax status since LLCs can also elect sub chapter S status or not. If you are self-employed (LLC or not) employer contributions to employees would reduce your net business profit which would reduce your SE taxes.

To elect sub chapter S status is a rather complex decision. There are far more unwise S-Corp elections than there are self-employed who would be better off with the election. The "all small business owners should at least form an LLC and most should elect sub chapter S status" are myths. Some small business owners should form LLCs and/or some should elect sub chapter S status, but the determination is always based on the specifics of the particular personal/business circumstances.
Thanks Spirit Rider.

You are 100% correct, I am actually an LLC, and I elected S-Chapter benefits once my company became profitable enough to justify the extra 1120S instead of Schedule C. I just called it S-Corp for Simplicity, but I am an LLC with a 2553 S-Election.

Here's how it worked out for me, and I will use round numbers for simplicity. I am not an accountant, but this is my understanding of my own situation to Spirit Riders point of it not always being worthwhile.

My wife and I each take a 50K salary for a total of 100K as employees of our LLC with S-Election. This represents the "Reasonable" wages. These wages are subject to FICA. In addition, for 2016 the company created a profit of $92k on top of all expenses, employee wages, (& employee matching contributions.) This 92k flows through to my personal 1040 where it is taxed at my personal Federal and NJ marginal rate (My residence).

If I did not have an S-Election, the 92K would have flowed through to my personal return and FICA would have been assessed on the full 92k.

Since Social Security is phased out at $118,500, by having an S-Election, I am saving the full FICA (SS+Medicare) on the first $68,500 of the $92,000, (50K Wages + 68.5k Profit= $118,500 Phase for Social Security) plus 2.90% Medicare Tax on the full 92K that would have been due for Self-Employment Taxes.

Social Security Savings : $68,500 x 12.4% = $8494.00
Medicare Savings : $92,000 x 2.90% = $2668.000
Extra Cost for Accountant : -$400 per year (vs a Schedule C)

Once over 200k, the surcharge for Medicare would kick in for an additional 0.90%.
(editted for correction on the Social Security Savings- since the Social Phase out is PER person, even for those Filing Jointly. Since the company/ownership is in my name (not 50/50 with the Wife) , I *think* that only my 50K of my wages count towards the $118,500 Phase out, and not the 50K my wife made as wages. I just thought of this as I went through this process, hopefully my accountant knows!)

This was probably better as a new topic, but since we are on it, I'd love to find any gaps in my logic. In 2 months of being on this board I've learned more than 20 years of paying an accountant or "fiduciary" suggestions from my (ex) financial adviser. Unfortunately I seem to care more about saving taxes than any of my previous accountants. This forum really is a great thing.

avalpert
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Re: S corp - 401K plan - profit sharing

Post by avalpert » Wed Mar 22, 2017 2:32 pm

investor999 wrote:
Spirit Rider wrote:
investor999 wrote:In my case since I am a pass through S-Corp the contributions reduce my business income and save me FICA on that amount.
If that business income you used for the employer contributions would have been allocated to a distribution, it wouldn't have been subject to FICA to begin with. You can't save what you wouldn't have paid. If you would have used that business income to pay yourself more W-2 compensation, then yes you would have saved FICA.

If I was an LLC, I'd pay the SE Tax anyway. This is why many small businesses with a profit take the S-Corp Election.
An LCC is not a tax status since LLCs can also elect sub chapter S status or not. If you are self-employed (LLC or not) employer contributions to employees would reduce your net business profit which would reduce your SE taxes.

To elect sub chapter S status is a rather complex decision. There are far more unwise S-Corp elections than there are self-employed who would be better off with the election. The "all small business owners should at least form an LLC and most should elect sub chapter S status" are myths. Some small business owners should form LLCs and/or some should elect sub chapter S status, but the determination is always based on the specifics of the particular personal/business circumstances.
Thanks Spirit Rider.

You are 100% correct, I am actually an LLC, and I elected S-Chapter benefits once my company became profitable enough to justify the extra 1120S instead of Schedule C. I just called it S-Corp for Simplicity, but I am an LLC with a 2553 S-Election.

Here's how it worked out for me, and I will use round numbers for simplicity. I am not an accountant, but this is my understanding of my own situation to Spirit Riders point of it not always being worthwhile.

My wife and I each take a 50K salary for a total of 100K as employees of our LLC with S-Election. This represents the "Reasonable" wages. These wages are subject to FICA. In addition, for 2016 the company created a profit of $92k on top of all expenses, employee wages, (& employee matching contributions.) This 92k flows through to my personal 1040 where it is taxed at my personal Federal and NJ marginal rate (My residence).

If I did not have an S-Election, the 92K would have flowed through to my personal return and FICA would have been assessed on the full 92k.

Since Social Security is phased out at $118,500, by having an S-Election, I am saving the full FICA (SS+Medicare) on the first $68,500 of the $92,000, (50K Wages + 68.5k Profit= $118,500 Phase for Social Security) plus 2.90% Medicare Tax on the full 92K that would have been due for Self-Employment Taxes.

Social Security Savings : $68,500 x 12.4% = $8494.00
Medicare Savings : $92,000 x 2.90% = $2668.000
Extra Cost for Accountant : -$400 per year (vs a Schedule C)

Once over 200k, the surcharge for Medicare would kick in for an additional 0.90%.
(editted for correction on the Social Security Savings- since the Social Phase out is PER person, even for those Filing Jointly. Since the company/ownership is in my name (not 50/50 with the Wife) , I *think* that only my 50K of my wages count towards the $118,500 Phase out, and not the 50K my wife made as wages. I just thought of this as I went through this process, hopefully my accountant knows!)

This was probably better as a new topic, but since we are on it, I'd love to find any gaps in my logic. In 2 months of being on this board I've learned more than 20 years of paying an accountant or "fiduciary" suggestions from my (ex) financial adviser. Unfortunately I seem to care more about saving taxes than any of my previous accountants. This forum really is a great thing.
Two other elements you might want to incorporate - by being an S-Corp with a 92k distribution you are forgoing the opportunity to put away ~18.5k pre-tax as additional employer contributions to a Solo 401k, depending on your Fed/State tax rates that alone could offset most of the reduced-FICA taxes. Also, by reducing what you are paying into social security today you are reducing your future benefits - you'd have to play with the detailed calculator to figure out what the impact is but it might be significant.

A minor thing too, you aren't accounting for the tax-deduction of the employer side of FICA taxes when calculating the savings - so 6.2% of SS taxes and 1.45% of Medicare taxes are deductible as a business expense and thus reduce your income taxes offsetting some of the increase.

investor999
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Re: S corp - 401K plan - profit sharing

Post by investor999 » Wed Mar 22, 2017 3:02 pm

Two other elements you might want to incorporate - by being an S-Corp with a 92k distribution you are forgoing the opportunity to put away ~18.5k pre-tax as additional employer contributions to a Solo 401k, depending on your Fed/State tax rates that alone could offset most of the reduced-FICA taxes.

Also, by reducing what you are paying into social security today you are reducing your future benefits - you'd have to play with the detailed calculator to figure out what the impact is but it might be significant.
Good point, but I would rather invest my money myself, as I don't have confidence that in 30 years that my benefits would outweigh my own investments. I invest/save everything that I can.

I am incorporating a 401k for the company this year. Tho, I have a total of 5 employees including myself so I have a few restrictions there vs a Solo 401k. This limits the amount my company can "match" to my safe harbor election of 3%. (My employees are contributing 4-10%). I am contributing (18K+18K) for 2017 for my wife and I, plus the 3% Match.
A minor thing too, you aren't accounting for the tax-deduction of the employer side of FICA taxes when calculating the savings - so 6.2% of SS taxes and 1.45% of Medicare taxes are deductible as a business expense and thus reduce your income taxes offsetting some of the increase.
So $92,000 x 7.65% = $7038
$7038 x 34.4% Fed+NJ Marginal = $2421.07

So it would save $2421.07 because of the deduction.There is some benefit like you said which I didn't factor into the S-Corp calculation, but I don't think it offsets the additional $4617 ($7038-$2421) in additional business tax burden. Unless I am missing your point.

Spirit Rider
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Re: S corp - 401K plan - profit sharing

Post by Spirit Rider » Wed Mar 22, 2017 5:25 pm

To add a little more information to avalpert's post.

Your Social Security benefit is based on your Primary Insurance Amount (PIA) calculated from your Average Indexed Monthly Earnings (AIME). The AIME is based on your 35 highest wage index adjusted earnings. The PIA calculation is calculated as 90% up to the first bend point (2017 = $885), 32% up to the second bend point (2017 = $5,336) and 15% to the max wage base (2017 = $10,600).

Earnings that would put you over the second bend point, FICA/SE tax costs you 12.4% to earn 15% future benefit increases. However, the earnings below the second bend point earn you 32% future benefit increases.

The bottom line is that while saving FICA/SE taxes now on earnings that will get you 15% increase in benefits makes sense, doing that for earnings that will get you 32%, is counter-productive.

If these wages will represent the majority of your 35 highest years, you should be paying yourself at least to the second bend point, 2017 ~= $64K.

investor999
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Re: S corp - 401K plan - profit sharing

Post by investor999 » Wed Mar 22, 2017 6:24 pm

Spirit Rider wrote:To add a little more information to avalpert's post.

Your Social Security benefit is based on your Primary Insurance Amount (PIA) calculated from your Average Indexed Monthly Earnings (AIME). The AIME is based on your 35 highest wage index adjusted earnings. The PIA calculation is calculated as 90% up to the first bend point (2017 = $885), 32% up to the second bend point (2017 = $5,336) and 15% to the max wage base (2017 = $10,600).

Earnings that would put you over the second bend point, FICA/SE tax costs you 12.4% to earn 15% future benefit increases. However, the earnings below the second bend point earn you 32% future benefit increases.

The bottom line is that while saving FICA/SE taxes now on earnings that will get you 15% increase in benefits makes sense, doing that for earnings that will get you 32%, is counter-productive.

If these wages will represent the majority of your 35 highest years, you should be paying yourself at least to the second bend point, 2017 ~= $64K.
Thanks for that. That's definitely interesting- I didn't realize it worked that way which is why I've been doing my best to avoid FICA.

Saving$
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Re: S corp - 401K plan - profit sharing

Post by Saving$ » Wed Mar 22, 2017 10:15 pm

gilgamesh wrote:
smitcat wrote:"Guideline confirmed I cannot roll my IRA into 401k to do backdoor Roth. Other than, the potential to go bankrupt is the only negatives. But, they grew from $120k AUM id Dec2015 to over $50M now. Isn't it typical for a company not to make a profit at this stage.
Does EF offer to roll over existing IRA's ?"

I believe either company would be able to do what we needed a number of years back to do the Roth.
Let me see if I remember this correctly....
We had funds mixed in our past mega corp 401k's - which were rolled into IRA's both pre and post tax.
We started our new company 401K which allowed funds to be added.
We moved only the tax deferred funds into our new 401k plan which left the post tax past IRA amounts.
We then moved the post tax IRA accounts to a new vanguard Roth IRA.
Of course we had all the forms required identifying and showing the pre and post tax contributions over the years.
Without the current 401K plan we could not roll the tax deferred out and so could not do the large Roth's.
I confirmed directly with guideline.com and they said they cannot do it...specifically said I cannot do backdoor Roth.
I think you are making this too complicated - the only question for them is will they allow employees enrolled in their 401k to roll both previous 401k's and tIRAs into the Guideline 401k...if yes, you are set. If no, that is a limitation of their 401k that may limit their market share. People roll previous 401k's and tIRAs into their 401k for all sorts of reasons, not just backdoor Roth.

It is not at all Guideline's place to tell you whether or not you can do a backdoor Roth....

Saving$
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Re: S corp - 401K plan - profit sharing

Post by Saving$ » Wed Mar 22, 2017 10:48 pm

Ethelred wrote:
smitcat wrote:I believe that $50M at 0.0003 is $15,000.
$40 X 1,000 = $40,000
You are both business folks - what do you think about this business's profit and future if these are the only fees?

Since being in business for myself I have watched for high costs on many places but have learned that too low costs are just as good an indicator of something that is/might/ will be a problem. They must be getting revenue back from the funds but I am not researching them myself so please check it out before you sign up.
I've been following this thread with interest, as we might be setting up a small business 401k this year or next.

That calculation is not quite right, but the overall reasoning is probably good.

Their current yearly turnover is:
1. $50M x 0.0003 = $15,000
2. $40 x $1000 x average employees per company (minimum 5) = $200,000 at very minimum.
3. $500 x number of companies signed up per year = close to $500,000, since they haven't actually been actively marketed for much over a year.

That said, the average AUM per company is only $50k, so I'd imagine that item 2. isn't a lot more than $200k. Probably less than a $1M.

Is this a viable business model, though? I'd say it depends. What happens if they can capture a significant portion of the retirement market, and you use their numbers, quoted here? https://techcrunch.com/2015/08/24/taskr ... -platform/

Only 0.1% of that market is still $4.4bn, which equates to AUM fees of $1.32M per year, plus admin fees of maybe something similar. If their fully automated system works perfectly, they will probably have good profits. If things go wrong and customers cannot get through, it could quickly fall apart.
1. Agree on the $15k if they have $50m under management at 0.03% AUM. HOWEVER, their website states "No AUM Fees."
2. Websites states $8/m per employee, $40/m min per company, so even companies with fewer than 5 employees pay the $40/m. Even if they only have 1,000 companies, that works out to $40 x 12 months x 1000 companies = $480,000
3. Agree website states $500 to sign up, so if they get 1000 new companies every year, that is $500,000
- seems sustainable, especially if they can scale. They are making most of their money on monthly fees from companies who stay, and are probably automated so it costs them very little.

On the company side:
Cost to employer with 5 employees: $480/year, with no AUM, and super low cost funds. Hard to beat.
With 5 or more employees, the cost to the employer is $96/year per employee. So cost to employer with 20 employees: $1,920/year, which is getting close to the cost of EF.

The downsides to Guideline.com seem to be they don't offer any Target Date funds; they claim to not like the added ER's on those funds, and it looks like they have some sort of "Managed Portfolios" in lieu of the target date funds that replicate the asset allocation, maybe similar to sites like Betterment. That is fine for Bogleheads and the like, but it presents an education hurdle for employers to convince the "set it and forget it" employees to become engaged enough to understand why it is ok to not offer Target funds, and how the Guideline.com site works...

Not sure how this factors into the discussion above, but the Guideline.com blog page also states "We are an ERISA 3(38) Fiduciary." https://blog.guideline.com/your-target- ... .xitx6oyx4

Seems to be a very compelling and interesting option for small business that have employees, and thus don't qualify for the Solo 401k. Does anyone know if Guideline provides the form 5500, etc.?

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Ethelred
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Re: S corp - 401K plan - profit sharing

Post by Ethelred » Thu Mar 23, 2017 6:28 am

Saving$ wrote:1. Agree on the $15k if they have $50m under management at 0.03% AUM. HOWEVER, their website states "No AUM Fees."
2. Websites states $8/m per employee, $40/m min per company, so even companies with fewer than 5 employees pay the $40/m. Even if they only have 1,000 companies, that works out to $40 x 12 months x 1000 companies = $480,000
3. Agree website states $500 to sign up, so if they get 1000 new companies every year, that is $500,000
- seems sustainable, especially if they can scale. They are making most of their money on monthly fees from companies who stay, and are probably automated so it costs them very little.

On the company side:
Cost to employer with 5 employees: $480/year, with no AUM, and super low cost funds. Hard to beat.
With 5 or more employees, the cost to the employer is $96/year per employee. So cost to employer with 20 employees: $1,920/year, which is getting close to the cost of EF.

The downsides to Guideline.com seem to be they don't offer any Target Date funds; they claim to not like the added ER's on those funds, and it looks like they have some sort of "Managed Portfolios" in lieu of the target date funds that replicate the asset allocation, maybe similar to sites like Betterment. That is fine for Bogleheads and the like, but it presents an education hurdle for employers to convince the "set it and forget it" employees to become engaged enough to understand why it is ok to not offer Target funds, and how the Guideline.com site works...

Not sure how this factors into the discussion above, but the Guideline.com blog page also states "We are an ERISA 3(38) Fiduciary." https://blog.guideline.com/your-target- ... .xitx6oyx4

Seems to be a very compelling and interesting option for small business that have employees, and thus don't qualify for the Solo 401k. Does anyone know if Guideline provides the form 5500, etc.?
Yes, you are right, my apologies. I corrected the previous calculation, but got mine wrong too.

What I will say is their website was just completely redesigned, probably yesterday. The AUM fee seems to have been removed coincident with that redesign. The redesign makes the actual portfolio choices clearer, though the graphs they show are actually very confusing. They show the impact of compound growth well, but the impact of volatility very badly.

smitcat
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Re: S corp - 401K plan - profit sharing

Post by smitcat » Thu Mar 23, 2017 8:07 am

"I think you are making this too complicated - the only question for them is will they allow employees enrolled in their 401k to roll both previous 401k's and tIRAs into the Guideline 401k...if yes, you are set. If no, that is a limitation of their 401k that may limit their market share. People roll previous 401k's and tIRAs into their 401k for all sorts of reasons, not just backdoor Roth.

It is not at all Guideline's place to tell you whether or not you can do a backdoor Roth...."

Saving$ - exactly , well said.

investor999
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Re: S corp - 401K plan - profit sharing

Post by investor999 » Thu Mar 23, 2017 9:41 am

smitcat wrote:"I think you are making this too complicated - the only question for them is will they allow employees enrolled in their 401k to roll both previous 401k's and tIRAs into the Guideline 401k...if yes, you are set. If no, that is a limitation of their 401k that may limit their market share. People roll previous 401k's and tIRAs into their 401k for all sorts of reasons, not just backdoor Roth.

It is not at all Guideline's place to tell you whether or not you can do a backdoor Roth...."

Saving$ - exactly , well said.
From Guidelines site

https://support.guideline.com/customer/ ... ine-401-k-



Conveniently Rollover Your Assets to Guideline 401(k)
Guideline happily accepts rollovers from the following types of accounts:


Conveniently Rollover Your Assets to Guideline 401(k)
Guideline happily accepts rollovers from the following types of accounts:

Traditional 401(k)
Roth 401(k)
Traditional IRA
Simple IRA (subject to a 2-year waiting period)
SEP-IRA
403(b)
Governmental 457(b)

gilgamesh
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Re: S corp - 401K plan - profit sharing

Post by gilgamesh » Thu Mar 23, 2017 10:21 am

investor999 wrote:
smitcat wrote:"I think you are making this too complicated - the only question for them is will they allow employees enrolled in their 401k to roll both previous 401k's and tIRAs into the Guideline 401k...if yes, you are set. If no, that is a limitation of their 401k that may limit their market share. People roll previous 401k's and tIRAs into their 401k for all sorts of reasons, not just backdoor Roth.

It is not at all Guideline's place to tell you whether or not you can do a backdoor Roth...."

Saving$ - exactly , well said.
From Guidelines site

https://support.guideline.com/customer/ ... ine-401-k-



Conveniently Rollover Your Assets to Guideline 401(k)
Guideline happily accepts rollovers from the following types of accounts:


Conveniently Rollover Your Assets to Guideline 401(k)
Guideline happily accepts rollovers from the following types of accounts:

Traditional 401(k)
Roth 401(k)
Traditional IRA
Simple IRA (subject to a 2-year waiting period)
SEP-IRA
403(b)
Governmental 457(b)
Thank you. I think the rep confused it for in plan Roth conversion or something. Good to know. Wasn't aware of the 2 year wait for simple IRA, Dang!

P.S: Is this correct? So, if my Simple IRA was started and I made my deposit 2 years ago, then I can rollover the entire amount (even recent deposits) ?

"The two-year period begins on the day the first contribution is deposited to a participant’s SIMPLE IRA and ends two years after that date. "
Last edited by gilgamesh on Thu Mar 23, 2017 10:39 am, edited 1 time in total.

investor999
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Re: S corp - 401K plan - profit sharing

Post by investor999 » Thu Mar 23, 2017 10:38 am

Check the IRS Simple IRA rules. You cannot withdraw/convert for 2 years from your first Simple IRA contribution without an additional 25% penalty on top of the regular IRA early withdrawal penalties.

investor999
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Re: S corp - 401K plan - profit sharing

Post by investor999 » Wed Dec 06, 2017 9:54 pm

Hi all,

I just wanted to report that 2 months in with Guideline.com (and their integration with OnPay.com) and everything seems to be going OK. There was an initial hiccup on the payroll integration side, but it was worked out within 24 hours as I think I was one of the first to use their Onpay integration.

Just thought I would report back on the experience thus far. Will update once 5500's are reported of course :)

Any questions about the process, interface, etc, feel free to ask.

Thanks

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