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Hi all,

I'm new to here and new to defined benefit plan. If I asked improper questions, please feel free to let me know.

I'm a s. corp owner, and only my husband and I will be qualified for DB. My company was incorporated in 2018 and it was LLC before that. My husband and I get W2 since 2018.  The income on W2 is around $150,000, but dividends for this year will be ~$400,000. We had profit sharing 401k last year. I'm thinking

1) should we get DB  for Tax wise

2) How much can we put in DB? Just want to get an idea. I know we will need an actuary if we plan go get DB. 

Both of us at 54 years old this year.

Any advice will help and I appreciate it. Thanks.

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The tax question may be better for your accountant. Are you and your husband the only employees or just one the ones who will be eligible for the plan? If you have other employees are you sure they won't be eligible and if the become eligible are you comfortable covering them? Is your income stable or are you just having a good year? Would you be happy with putting $112K or less into a plan for you and your husband or do you want to make larger contributions? If the former you can probably do it with a SEP or 401(k) if you want to put away more a DB plan might be right for you as you could get much larger contributions depending on Plan design.

My advice would be to find a local actuary and have them do a study for you.

 

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Thank you Lou.

My daughter works for the company as a part time (most in summer). We like to put more than$112k into the plan. We are also expecting more income from the company.

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Is w2 150k each or total? If desirable to increase dB deduction are you willing to increase w2s? 

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Hi Mike, W2 150k  is total for 2018.  We pay ourselves annually. Yes, how much should we increase? Thanks.

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How is 150 divided? 

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Well, if you don't increase W-2 above 75k you are looking at a max, each, of roughly $190k each based solely on your service with the s-corp.  If you aggregate service with the LLC then the 190k goes up to about $285k each.  You can also get to the $285k by increasing the 75k to about $115k when averaged with prior years.  The above are wild ballparks and not to be relied upon as there is significant information needed to calculate the amounts precisely.  Further, some of the amounts quoted above rely on the use of the 50% cushion in the first year which, if nothing changes, reduces the second year deduction to about 2/3 of the first year. You need to hire an actuary.

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Thank you,  Mike, for all the explanations. I really appreciate it. I think it's a good idea to find an actuary and set up a DB. Have a great day.

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I suggest that you have a discussion with your tax advisor also.  Dividends flowing through from a Sub S should be taxed currently at 15 or 20%.  Why convert that favorable rate into the significantly higher rate on ordinary income from a pension plan in the future?  

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Actually, S-corp. dividends are generally not taxable but pass-through earnings are, and at ordinary income, not capital gain, rates. However, as much as 20% of the pass-through income can be deducted under the qualified business income (QBI) rules, which could argue against running that income through a qualified plan where they would lose their QBI qualification when distributed.  If the business in question is a so-called SSTB (specified service trade or business), which includes a variety of professional and personal service occupations, the QBI deduction phases out for higher income taxpayers. Deductible contributions to a qualified plan that reduce taxable income may allow for a greater QBI deduction. I suggest an accountant as well as actuary be involved in the discussion. Note: QBI deduction is currently set to sunset in 2025.

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Thank you FPGuy. My dividends (or called distributions for S corp) are pass through as far as I know. QBI Phases out for Married joint is $315k, am I right?

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