Pension Plan Comments at Tax Loopholes Blog
Continuing on my theme of “leave no question unanswered,” there was a comment on the old Blog regarding pensions that I wanted to make sure I address. Oftentimes the very best end-of-the-year, last minute type of tax planning is by the use of a pension plan. So, it’s especially pertinent right now.
Posted by Peggy on Nov 8th: I am currently looking at Solo eligibility since we have employees and am leaning toward a profit sharing plan for 2007 as a result. With this, my S-corp can contribute 25% of our salaries and take the deduction for the business. But we already max out the 2007 allowable contributions to 401k plans through our other employers.
But that leads me to a follow up question that might be a good blog topic since it probably affects a lot of people who have started businesses but haven’t quit their day jobs.
How are the various retirement plan contribution limits affected when you participate in multiple plans and what impact would this have on your small business retirement plan strategies?
My understanding, which could be wrong, is that the $15,500 contribution limit for 401k plans this year is for the total across all plans. So then the strategy is which plans to participate in and how much for each.
Your thoughts would be greatly appreciated!
Answer: I’ll do a quick answer, but I think you’re right - we need a blog post on this one. Maybe I can get my colleague Megan to do that! She’s become a bit of an expert on pension limits and pension investing.
The $15.5 K contribution limit is for defined contribution plans only. In other words, you can set up a Solo 401(k) plan (if you qualify, meaning you and your spouse are the only owners/full time employees) you can put aside $45K or $50K if you’re 50 or better. You can also set up a defined benefit plan. I’ve seen contributions of $125,000 or more on those.
As far as contributing to multiple plans, the key is whether you have multiple ownership. If you work at a W-2 job and have a pension plan there and then have a side business, you can have a pension plan there as well. But, if you own two businesses, you can’t hit the max for both businesses and their pension plans.
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Sorry, but this answer is woefully incomplete.
The case where you work a W2 job and have a pension plan there but you also have a side business is fairly common. What are the limits? In particular could you max out 401k contributions for the W2 job and still have other contributions (perhaps via a SIMPLE) within the side business?
We seem to be talking in circles.
There is one big question here:
(1) Do you have common ownership on the business?
If “no” (as in the case of a W-2 job where someone other than you owns the company and a side business that you own), then you can have two plans, maxed out to the limits based on those plans.
If “yes” (ie..two companies that you control), then you can NOT have two plans.
The issue is ownership and control on the companies. Sorry I didn’t have that more clear in the first response.
I called the guys at Pensco to ask about multiple retirement plans across multiple businesses entities. Specifically, I asked them if I had a S-Corp and a C-Corp, could I have a retirement plan in each entity?
The Pensco rep. that I talked to indicated that it is possible for each entitiy to have a retirement plan. However, the maximum limit contribution limit across all plans is 45k - 50k.
So for multiple 401K’s, the combined deferral portion could not exceed approx. ~15K and the combined profit sharing portion could not exceed (~45K - combined deferral portion).
So is the Pensco rep. incorrect about being able to have multiple retirement plans in multiple entities, as long as you don’t exceed the combined maximum limits?
Lots of questions on pension today!
Can you have multiple plans? Sure. BUT you can not exceed the total IF you own all the companies.
For anyone else reading this, please understand that Ally’s question here is very different than the 1st question (having a W-2 job at a company owned by someone else).
To be honest, I’m nervous going into this much detail in a comment, because I’m afraid someone is going to misinterpret the answer.
PLEASE talk to your CPA about your own circumstances. It’s possible that there is a nuance to your own situation that is different than the generalities we’re covering here.
Also, the plan discussed in Ally’s post is different than a Solo 401(k).
So many plans, so many options. Get an expert on your side!
On a slightly different note, how can a husband and wife each contribute their respective self-directed IRA funds into a single, newly formed LLC, without violating prohibited transaction status?
You might want to take a look at my book “Insider’s Guide to Tax-Free Real Estate Investing.” We go into the case law in much more detail then I can cover through the blog.
The potential issue you mean would be with disqualified persons, I think. Prohibited transaction would mean that the LLC was investing in something that was improper. If we’re on the same track with my assumption, then please take a look at the book for the case law we’ve relied on.
It seems that if the goal is to invest in a property you could also have an LLC owned by husband’s IRA and an LLC owned by wife’s IRA which together invest in a property.
I just read your “Tax-Free Real Estate Investments” book.
Here is a parapgrah from p.97 that seems to suggest that a husband / wife can combine their personal funds with their self-directed 401(K) funds to invest into a LLC at business inception:
“Many financial advisors believe that if you, your direct relatives, and your pension fund all invest in the business simultaneously at the very beginning of the business’s existence, that transaction won’t be considered prohibited.”
Has there been actual cases / case laws that support this view? How can I ensure that if I implement this strategy, it won’t be prohibited at a later time?
As far as “will the law change” - none of us can ever know what might happen in the future for laws. Unfortunately, there isn’t any guarantee - just look at the changes for homeowners and tax free capital gain exclusion proposed for January 2008!
Generally, though, if there is a law change, past transactions based on old law are almost always grandfathered in.
I think you should talk over the specifics of what you want to do with your own pension custodian. If there is something done wrong, their name is on the line as well.
As an example, the IRS is now taking a “hard look” at SLLC’s owned by IRAs. This is something that isn’t in any case law anywhere, it’s simply known because there are some custodians who are very in tune with the IRS and know where the problems might be.
Once you create and fund an IRA LLC jointly using personal and IRA funds, what are the consequences of subsequent financial transactions?
For instance, what will happen if I add additional IRA funds to the LLC throughout the year?
What if I need to take out my a portion of my personal funds from the LLC, being careful not to touch the IRA portion?