Continuing on my theme of “leave no question unanswered,” there was a comment on the old Blog regarding pensions that I wanted to make sure I address. Oftentimes the very best end-of-the-year, last minute type of tax planning is by the use of a pension plan. So, it’s especially pertinent right now.
Posted by Peggy on Nov 8th: I am currently looking at Solo eligibility since we have employees and am leaning toward a profit sharing plan for 2007 as a result. With this, my S-corp can contribute 25% of our salaries and take the deduction for the business. But we already max out the 2007 allowable contributions to 401k plans through our other employers.
But that leads me to a follow up question that might be a good blog topic since it probably affects a lot of people who have started businesses but haven’t quit their day jobs.
How are the various retirement plan contribution limits affected when you participate in multiple plans and what impact would this have on your small business retirement plan strategies?
My understanding, which could be wrong, is that the $15,500 contribution limit for 401k plans this year is for the total across all plans. So then the strategy is which plans to participate in and how much for each.
Your thoughts would be greatly appreciated!
Answer: I’ll do a quick answer, but I think you’re right – we need a blog post on this one. Maybe I can get my colleague Megan to do that! She’s become a bit of an expert on pension limits and pension investing.
The $15.5 K contribution limit is for defined contribution plans only. In other words, you can set up a Solo 401(k) plan (if you qualify, meaning you and your spouse are the only owners/full time employees) you can put aside $45K or $50K if you’re 50 or better. You can also set up a defined benefit plan. I’ve seen contributions of $125,000 or more on those.
As far as contributing to multiple plans, the key is whether you have multiple ownership. If you work at a W-2 job and have a pension plan there and then have a side business, you can have a pension plan there as well. But, if you own two businesses, you can’t hit the max for both businesses and their pension plans.