Case 1: Lisa and her daughter (Judy) own a Yoga studio (S-Corp). There are no rank and file employees. Should Lisa set up a 401(k) plan or a SEP IRA?
For the plan year 2022, if a 401(k) plan is set up, then
If a SEP IRA is set up, then
Thus, when compared with SEP IRA, Lisa and Judy can contribute $47,500 more towards their 401(k) plan accounts. In addition, their taxable incomes are reduced by $47,500.
Case 2: Susan is a realtor. She only receives 1099 for her commissions. Her 2022 net profit after ½ FICA deduction is $500,000. She doesn’t have a 401k plan or any retirement plan. What is Susan’s maximum contribution she can make to her retirement plans?
We design two plans: one is the 401(k) plan and the other one is the defined benefit plan. For the 401(k) plan, Susan can make the after-tax contribution to the plan. Then, the after-tax contribution can be converted to Roth. With this design, the total deductible contribution is $200,000 and the total after-tax contribution is $40,500. Susan’s taxable income is reduced to $300,000 from $500,000.