Prioritizing Investment Accounts with S Corp

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Prioritizing Investment Accounts with S Corp

Post by outofstep »

I'm trying to create a simple list of which accounts to prioritize so I can leave instructions on our family's investment plan document in case my wife has to take over, and also just good to check my own understanding as I plan how we're filling these buckets throughout the year. I have found a fair amount of discussion for Sole Proprietors, but not specifically for S-Corps. Those with better understanding than I have about taxes and such -- is my logic on the below scenario correct?

My wife and I are MFJ, all of our finances and investments are treated as one big pot. Our sources of income are our W2 salaries from the S-Corp (IRS requirement to pay "reasonable salary" for our roles), her W2 salary from her full-time job, and the pass-through S-Corp income.

Except for my wife's 401k with her other job, all of the accounts are at Vanguard and have no per-fund account maintenance fees. I'm removing the "traditional vs Roth" variable from this equation since that will vary by our income and the tax code, and I'm looking for an "all things being equal" hierarchy.

Here's how I have things prioritized

As long as the QBI is in effect, prioritize in this order:

1. Roth IRAs - we are above the IRA deduction and Roth contribution thresholds, so we're always doing backdoor Roth conversions right away. I put this at the top because of the flexibility that Roth IRAs have on withdrawing contributions or early withdrawals for qualified scenarios. We don't plan to do either, but having the options elevates this choice for us.

2. solo 401k and Roth solo 401k employee deferrals - The Roth deferrals are effectively equal to Roth IRA contributions except that the Roth IRA has the aforementioned withdrawal flexibility. If favoring pre-tax contributions more than Roth, and not concerned about Roth IRA withdrawal flexibility, then solo 401k would jump to #1 spot

3. wife's other 401k - more limited options, and adding this in means dealing with an extra custodian and account to track. Max out the above options first

4. solo 401k employer contribution - these contributions reduce the QBI deduction, but it's better than the alternative...

5. taxable account

If/when the QBI goes away:

Move the solo 401k employer contribution to the top, the rest stays the same. Since our salaries are "must pay," those payroll taxes are unavoidable, best to max out the employer 401k contribution and reduce the business income as much as possible to lower the pass-through tax

1. solo 401k employer contribution
2. Roth IRA
3. solo 401k and Roth solo 401k deferrals
4. wife's other 401k
5. taxable
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