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Author: foobarista Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76395  
Subject: Solo-K + (Roth/Traditional) IRA? Date: 3/20/2003 5:28 PM
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Hi,

DW has a job that only pays commissions (ie, she's a schedule C
independent contractor, who will get 1099's). She's starting to get
her first commissions, so we want to set up a Solo-K, which is for
small business owners and others who declare income on a Schedule C.
(These are cool - you can put 20% of your Schedule C income in it,
up to $30K, and it has properties like a 401K/Traditional IRA
otherwise)

Can we do this and still fund her Roth IRA?

Thanks,

--Foobarista
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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35939 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/20/2003 7:42 PM
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The max solo 401(k) contribution for 2003 is $40K, or $42K if over 50 (I believe). You can still fund the Roth.

Nick

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Author: billyturtle Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35942 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/20/2003 8:20 PM
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Can we do this and still fund her Roth IRA?

It depends on your AGI (adjusted gross income) for the year in which you wish to make a contribution.

http://www.turbotax.com/articles/WhatAretheIncomeLimitsonaRothIRA.html

If you make less than $150k you can make a full contibution. If you make less than $160K you can make at least some contribution.

billyturtle

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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35950 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/21/2003 9:51 PM
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Just to clarify on the Single K contribution limits.
In general it is 40k 42k if over 50, but here is the breakdown:

12k "Employee" salary Deferral
25% of pay as an "employer" contribution
both amounts cannot exceed 40k.
However since you are schedule C it gets a little weird.
It is 25% of reported net minus 1/2 the self employment tax. this usually works out to around 20%.
If you are a Sub S corp or a C corp, then you can do the full 25%.
The $40k limit still applies.
The 2k Catch up is only if you are turning 50 this calendar year or are already over 50.


Bill

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35952 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/23/2003 9:56 AM
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Just to clarify on the Single K contribution limits.
In general it is 40k 42k if over 50, but here is the breakdown:


Actually Section 415 limits are the lesser of $40000 or 25% of salary. The catchup provision 2K (2003) is for the 401k elective deferral $12000 plus 2k catchup. 415 limits include all annual additions (deferrals, employer match and forfeitures).

It's my understanding that the 415 limits are not raised by the catchup.

Also,if you have employees, individual 401ks are prohibited.


buzman


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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35953 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/23/2003 4:09 PM
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The catchup contribution is seperate and distinct from the IRC 415 limits. The 2k contribution can be made once the 415 limits are reached. Thus you are able to reach 42k.

Bill

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35955 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/23/2003 10:16 PM
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The catchup contribution is seperate and distinct from the IRC 415 limits. TRUE

The 2k contribution can be made once the 415 limits are reached.
FALSE-

The 2k catch up for age 50 or older is for the 401k elective deferral totally independent of the 415 limits.

401k is the section of the code which refers to pre taxed salary deferrals. There are profit sharing plans funded without employee deferrals.

The 415 annual additions limit consists of pre tax salary deferrals, after tax contributions(employee), forfeitures and employer contributions.

A Summary of Selected Provisions of the Economic Growth and Tax Relief Act of 2001 states "The annual additons limit for most defined contribution plans under Section 415 has been increased to the lesser of $40000 or 100% of compensation..."

Also, www.cfp.edu The College for Financial Planning has a chart with various limits included is the 415 limit at 40K, the 2k catchup is listed separately.

I find nothing that supports your assertation, however, retirement limits are very complex.

buzman





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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35956 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/24/2003 8:14 AM
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The 2k contribution can be made once the 415 limits are reached.

As Buzman points out, that is true ONLY up to the point where the participant reaches the 415 limit of 100% of compensation or $40,000, whichever is less. Therefore, a total contribution of $42,000 will NOT be allowed. Current IRS regulations will not permit that to happen.

Regards...Pixy


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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35959 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/24/2003 7:17 PM
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Sorry to be a stick in the mud on this issue, but I will continue to disagree with the idea that catch up contributions are to be considered under the 415 limits.
Referenced is a link from Vanguards Web site

http://institutional.vanguard.com/cgi-bin/INewsPrint/100834260#contributionfactor

From Mpower:

http://www.mpowercafe.com/retirement/features/features.1.3.1_04032002.html

Key wording is below:
The nice thing about the catch-up limit is that it is not subject to any other federal or plan contribution limits. Catch-ups are made on top of your current limits.

Do you have a specific reference as to where it states that catch ups are to be considered under 415 limits. I searched the IRS website and found none. My understanding is they are separate from all plan and federal limits.

Bill

Thanks



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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35961 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/24/2003 9:07 PM
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One more source to support the catch up discussion.

http://www.soa.org/sections/egtrra.html#2b

I agree totally with the statement that you cannot contribute more than 100% of compensation. However, my contention coninues to be the catch up will allow you to get to 42k. 2k above the 415 limit since the catchup is not limited by any plan or federal limits. It is not factored in for testing purposes, either discrimination or top heavy.

Bill

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35962 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/24/2003 10:22 PM
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I ran a google search-IRC Section 415 limits. The first link was University of California's employee benefits' website-www.atyourservice.ucop.edu/form. Same deal 40K limit

Try this link www.cpf.edu, you may not be able to access it. I don't know how to cut and paste urqs :(

Not trying to sound like smarta$$, but I just spent three weeks of intensive preparation for the Certified Financial Planner exam. We had to prepare for the catchup provisions but none of the readings had any mention of 42k 415 limit.

Retirement planning has the most complex and arcane regulations. I did not realize that the 415 limits are to adjusted for inflation. I had never read that until last night.

I stand by my assertation.

But retirement planning is the most complex area of tax law.

buzman



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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35963 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/24/2003 11:01 PM
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Ok I guess, you stand by yours and I'll stand by mine.
I agree on the 100% of pay deal, but someone earning a substantial income can defer the full 12k, receive 25% employer contribution (those 2 amounts cannot exceed 40k)(Thus your CFP training is correct when iot states the 415 limit is 40k.) Then do an additional 2k catch up.
I like my Society of Actuaries link as a basis. You don't mess with actuaries, they are right 99.5678943% of the time.
Anyway, not to sound like a smartie pants either, but I sell this stuff and train CFPs on retirement plans.
Maybe I'm wrong on this, and if so, will be greatly appreciative for having the debate. But would love to see a language from the IRS that states the catch up is inclusive of the 415 limits.


Bill

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35964 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/25/2003 8:08 AM
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Bill writes:

I agree on the 100% of pay deal, but someone earning a substantial income can defer the full 12k, receive 25% employer contribution (those 2 amounts cannot exceed 40k)(Thus your CFP training is correct when iot states the 415 limit is 40k.) Then do an additional 2k catch up.

OK, you and Buzman forced me to reread my copy of the proposed IRS Reg 142499-01 that deals with this issue. Here are some pertinent quotes:

The legislative history to section 631 of EGTRRA indicates that the intent of Congress in enacting section 414(v) was to allow a catch-up eligible participant to make additional elective deferrals over and above any otherwise applicable limit, up to the catch-up contribution limit for the taxable year. The proposed regulations would provide that elective deferrals made by a catch-up eligible participant are treated as catch-up contributions if they exceed any otherwise applicable limit, to the extent they do not exceed the maximum dollar amount of catch-up contributions permitted under section 414(v). (Emphasis added.)

Under the proposed regulations, catch-up contributions would not be taken into account in applying the limits of section 401(a)(30), 401(k)(11), 402(h), 402A(c)(2), 403(b), 404(h), 408(k), 408(p), 415, or 457 to
other contributions or benefits under the plan offering catch-up contributions or under any other plan of the employer.


Catch-up contributions shall not be taken into account in applying the limits of section 401(a)(30), 401(k)(11), 402(h), 402A(c)(2), 403(b), 404(h), 408(k), 408(p), 415, or 457 to other contributions or benefits under an applicable employer plan or any other plan of the employer. (Emphasis added.)

Examples. The following examples illustrate the application of
this section. For purposes of these examples, the limit under
section 401(a)(30) is $15,000 and the applicable dollar catch-up
limit is $5,000 and, except as specifically provided, the plan year
is the calendar year. In addition, it is assumed that the
participant's elective deferrals under all plans of the employer do
not exceed the participant's section 415(c)(3) compensation...
(Emphasis added.)

Given all the above, I now believe Bill is absolutely correct. While no example specifically addresses the $40K contribution cap issue, 415(c)(3) compensation means the compensation received by the participant from the employer for the year. Thus, it appears 100% of compensation is the upper contribution limit of all contributions combined. And because "catch-up contributions shall not be taken into account in applying the limits" of section 415, it seems to me that a $42K contribution this year is therefore possible.

Besides, would Vanguard or the Society of Actuaries be wrong? :-)

Regards...Pixy

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35965 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/25/2003 1:47 PM
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I now believe Bill is absolutely correct

Me, too.

Besides, would Vanguard or the Society of Actuaries be wrong? :-)

Vanguard, maybe, the Society of Actuaries, no way.

buzman


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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35966 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/25/2003 7:39 PM
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OK, you and Buzman forced me to reread my copy of the proposed IRS Reg 142499-01 that deals with this issue.

C'mon Pixy, we all know you read yourself to sleep everynight with the Internal Revenue Code!!!

I knew I was on solid footing once the I found that Actuary site.

This shows why the Fool is great, the exchange of ideas and information!!!

Bill

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35967 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/26/2003 8:19 AM
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Bill sez:

C'mon Pixy, we all know you read yourself to sleep everynight with the Internal Revenue Code!!!

Drat! Now my secret cure for insomnia is out there for the whole world to see. :-)

Regards...Pixy


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Author: JWR1945 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35968 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/26/2003 11:34 AM
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Drat! Now my secret cure for insomnia is out there for the whole world to see.

The trouble is that is keeps TMFPixy awake. He is riveted to every page. The excitement! The suspense!

Have fun.

John R.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35969 of 76395
Subject: Re: Solo-K + (Roth/Traditional) IRA? Date: 3/26/2003 1:35 PM
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John R sez:

<<Drat! Now my secret cure for insomnia is out there for the whole world to see.>>

The trouble is that it keeps TMFPixy awake. He is riveted to every page. The excitement! The suspense!


LOL. Nah, while sometimes it seems like it's all fascinating fiction, it doesn't really keep me awake. But it does keep me on my toes. Just when I think I pretty much understand what's going on, the exceptions start popping up -- And those can cause the most gawd-awful nightmares I ever snored through.

Regards...Pixy



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