Keough 2002 changes

[Guest JasonMC]

In 2002, can I still contribute to both my Profit Sharing Plan and Money Purchase. I know limits are up to $40k or 100% of income whichever is less but I heard something about other changes. Do I still need the 2 plans or can I just have one? Can someone help sort out the details and where does the IRS talk about this (besides Pub 560 because it doesn't get specific). Thanks.

[BPickerCPA]

The dollar limit is $40K, but there is still a percentage limitation of 25% of earned income. You can now use 25% for the profit sharing plan where that limit use to be 15%. Therefore, you can freeze or terminate the money purchase plan, if you desire. Check with your accountant as there may be ramifications if you have employees.

[wmyer]

To clarify, the 25% limit that BPicker is talking about is the 25% deductible limit (404a limit). There is, in addition, a 100% limit or $40,000 for total contributions (415c limit). Here's how it works: If you are self-employed with no employees and your net earned income is $100,000, you can contribute $25,000 to a pension plan; or $25,000 to a profit-sharing; or $25,000 to the two combined. Many companies now are doing a "uni-401k" for sole-proprietors because salary deferral contributions do not count towards the deductible limit starting in 2002. So, if you have a profit-sharing plan with 401(k), then in the scenario above, you can contribute $25,000 in profit-sharing contributions PLUS $11,000 in salary deferral contributions for a total of $36,000.

[BPickerCPA]

WMyer's computation ignores the fact the contribution itself is a deduction for computing net income. The example would work if one were talking about a w-2 of $100,000.

However if net self employment income were $100,000, the 25% limit would translate to a 20% contribution of $20,000. If you add a 401k for $11K, then the contribution limit will become 20% of $89K. Still not a bad deal to add the 401k.

[Mike Preston]

Hi, Jason. From just a few miles down the road (San Ramon), here's ,y $0.02. You can probably get by with only one plan. Most folks in California had planned to merge the money purchase plans into the profit sharing plans when there were combination plans in 2001. However, the California legislature is fighting a pretty big deficit at the moment, and they have not conformed the state tax law to the federal tax law. Hence, it is possible that those folks who merge their plans into one will find themselves with a bigger state tax than they expect. I believe that California will eventually conform, but you may want to avoid the issue by keeping your 2 plans for 2002, unless California actually conforms. Once that happes, there really are very few siutations where there is an advantege to having multiple plans.