Well, it certainly is that time of year again. Where there WAS sleep, there IS coffee, and without the latter, the former is inevitable. Suffice to say that we are looking forward to reuniting with our families after April 17th! In the meantime, there is work to be done!
Each tax season, we field countless questions on retirement contributions, whether it is, “how much can I contribute?” or “how much can I deduct?” or “when is the deadline for contributions?” or “when is the deadline to establish the account?” or some other variant of the aforementioned. As is the case with most tax questions, the answers are many and often nuanced.
Take, for example, a husband and wife, who want to max out their 401k and IRA. How much can they contribute? Well, it depends. If both have a 401k sponsored by their employer, then they can both max those suckers out with $18K in contributions in 2017 ($18,500 in 2018). When it comes to the IRA? Well, that’s going to depend on their income level. If their MAGI (Modified Adjusted Gross Income) is less than $99K in 2017 ($101K in 2018), then they can each contribute and deduct $5,500. If they earn between $99K-$119K, then they can contribute the full amount, but their deduction will be limited. If they are above $119K, then they can contribute the full amount but can deduct none of it. Why would you contribute into an IRA if you couldn’t deduct the contributions? So you can backdoor it into a Roth IRA, duh! Granted, you’d only do that if, as a Married Filing Joint Couple, your MAGI was greater than $196K, which prevented you from contributing straight to the Roth in the first place.
There are many twists to the above example, such as when one spouse isn’t covered by a 401k plan, or if both aren’t, or if you’re single, etc.
What about when it comes to a SEP-IRA? Well, you can establish those up to the date you file your tax return, including extensions. The same timeline holds true for contributions to the account. This means that you can get a tax deduction for 2017 with a contribution made as late as October 15th, 2018 (September 15th for Partnerships and S-Corps). Pretty wild huh? How much can you contribute? This depends on your entity type. If you’re an S-Corp, then you can make a contribution of up to 25% of the W-2 wages you paid yourself up to $54K for 2017 ($55K for 2018). If you have an LLC or sole proprietorship, then you can contribute up to 20% of your net taxable income (without respect to the contribution itself), once again to the same maximums as that of S-Corps.
But what about a Solo 401k? Ah yes, this typically allows for higher contributions than a SEP. This is because you are not bottle-necked as greatly by the company’s profitability. Under a Solo K, you can contribute on the employee side up to $18K in the same way as the very first example above. This is true even if the company has no taxable net income. On the employer side, you can contribute 25% of W-2 wages (or 20% of taxable income for LLCs/Sole Props) in the same way you do for a SEP-IRA. You are still capped at $54K between EE and ER, but a quick example will illustrate the advantage.
- An S-Corp pays its shareholder $100K in W-2 wages. In a SEP, the maximum contribution is $25K. In a Solo K, it is $43K ($18K on the employee side PLUS $25K on the employer side).
The point here is that so much of how much you can contribute is situational and not a simple black and white rule. If you need help in this area, we are here to help!
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