Beg. 2002, 401(k) far superior to SIMPLE or SEP IRA's

[Guest Eric Cernyar]

I am a small business owner (S-corp) w/ only myself & my wife as employees. I'm looking into SIMPLE IRA, SEP IRA, and 401(k) options. The first two are easy to administer & book. The 401(k) takes more time, and can be expensive, but I've learned of a fairly cheap option (401keasy -- $500 setup + $495/yr). So is the 401k worth it? I'm not sure.

Assume that my S-corp offers my wife and I a compensation package worth $40,000, comprising the base salary plus retirement benefits. Assume that we want to see $14,000 of that go into retirement accounts (IRA or 401(k)). The corp. can accomplish this with either the SIMPLE IRA or, starting 2002, with a 401(k) plan.

SIMPLE IRA option (assume self and wife each get $20K pkgs):

$19,420 base salary

Take home pay = $13K - income taxes - FICA on base salary

Elective deferral = $6,420 (max is $6500 in 2001).

Employer matches = $580 (~3% of $19,400)

2002 401(k) plan:

$16K base salary

Take home pay = $13K - income taxes - FICA on base salary

Elective deferral = $3K (new limit is 100% of base salary)

Employer matches & non-elective contributions = $4000 (because employer can match more than dollar for dollar (right?) and, starting 2002, can deduct contributions up to 25% of the employees' compensation)

In both cases, we end up with $14K in retirement savings. But because there are no FICA/employment taxes on employer matches and contributions (correct me if I am wrong), choosing the 2002 401(k) plan would result in the combined FICA/employment tax savings of 2*($19.42K-$16K)*0.153, or $1046.52.

If so, then the benefits of a 2002+ 401k plan may exceed the dollar costs of administering it. However, administering a 401k will probably take a lot more time (even w/ 401keasy, so it prob. still isn't worth it).

Any thoughts?

Eric

[John G]

I can't answer your complex question, but you seem to be heading in the right direction on evaluation. You should also consider one other option: a pension/profit sharing plan .

My wife and I own a sub-S and in the early 1990s adopted a "global" P/P plan that we found through Schwab. An independent agency/accountant obtained IRS approval for this plan, but it was essentially self directed at Schwab. Under this prototype system, you choose the ground rules such as eligibility, vesting, level of control, etc. For a number of years, we were pumping a max amount into the plan. If I recall the maintenance cost was about $150/year to the agency/accountant, and nothing at Schwab because of the amount of assets. Try NRPTC 800-IRA-N-KEO in New Brunswick NJ to see what they currently offer.

I am sure that this arrangement can be found with some other brokerages. This approach substitutes for a local legal draft plan which has much high costs. It is best used for simple systems such as a sub-S with just the family drawing salary. The more complicated the circumstances the more likely you want local legal expertise.