One-Man 401k

[Guest Karen H. Meyer]

With the EGTRRA changes that go into effect next year is my scenario below possible.

one-man company making $100,000 annually establishes a 401k P/S. Since the deferrals are not included in the 25% deductible limit can he defer $11,000 and the company make a 25% P/S contribution for a total of $36,000, since he would not be exceeding the $40,000 dollar cap?

[stephen]

I think the answer is yes he can.

[Richard Anderson]

I think not. For plans beginning after 12/31/2001 the 415 limit for DC plans is the lesser of $40,000 or 100% of comp. $11,000 deferral and $36,000 ER contribution equals $47,000.

[Appleby]

For $100,000 compensation the maximum amount is $36,000 ( for tax year 2002)

$11,000- employee deferral

$25,000- 25 percent (maximum deductible amount) employer contribution

$36,000 total

If the individual is age 50 or over, an additional amount can be made as 'catch-up' contribution

[Richard Anderson]

I misread the oringinal post. I thought $36,000 was the ER contribution, not the total.

Appleby's analysis is correct.

[Tom Poje]

actually, if he is age 50 it appears he can also kick in an extra $1000. What a great deal, huh?

[Appleby]

Absolutely, especially since the $1,000 catch-up contribution is not subjected to any restriction, such as 415, 404 etc.

[wmyer]

It seems he can also kick in an additional $4,000 post-tax, for a total of $41,000!

[MGB]

If he is over 50, he probably could get an even higher deduction than $37,000 by using a defined benefit plan instead of a 401(k)/profit sharing.

[Appleby]

True MGB,

However, that has always been the case with the DB Plan. Now we have more benefits for someone who does not want to be burdened with obtaining the services of an Actuary.

Wmyer

Are you saying after tax contributions are not subjected to the 415 limit?

[wmyer]

No, post-tax is subject to 415 limit, but with comp. of 100,000, if he's over 50, he can do 41,000 as follows:

11,000 salary deferral

4,000 post-tax

25,000 company p/s contribution

1,000 salary deferral catch-up

---------

41,000

[Erik Read]

What a beautiful world we have now! 41% of owners comp put into a Retirement plan - I remember struggling to get past 15% in some years!

GO EGTRRA!

[Tom Poje]

and that would be 2002. how about in 2006 when the catch up is $5000. what a country!