I asked this a few months ago and it resulted in a gem of guidance that saved me a ton.

But back to the original question - I am curious as to the take of the money wizards.

Facts: Solely 401(k) for my single person LLC. This allows me to put $18K + 35K (if income is sufficient) away.

However, if my wife is 'engaged' in the business, I can allocate profit (or hire her) and she can contribute also (same guideline - 18K + 35K if sufficient income).

Now I am fortunate enough to have sufficient income, but the challenge is this:

For every dollar I allocate to my wife, I will have to pay the full boat on Social Security ($15.2%), whereas if I don't allocate, that incremental money is only at 3.2%.

So, does anyone think it is worth paying this 12% penalty (my words) to get the deferral of income tax on the cash?

Note: Already have her set up with HRA thanks to advice last go around.

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Posted by igoringa

South Mississippi

Member since Jun 2007

11875 posts

Posted on 2/20/15 at 10:29 am to igoringa

One bump and I will let it die.

Just curious as to folks take.

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Posted by Tigerstark

Parts unknown

Member since Aug 2011

5973 posts

Posted on 2/21/15 at 8:14 am to igoringa

What I have seen some people do is not put the big income to their wife, but a much smaller salary - say $22,000 - to their wife, and she can then save the full $18,000 plus a small amount of "employer" contribution on top of that. With your set-up there is no testing to be concerned with since there are no employees.

So, if my math is correct your "12% penalty" is $2,640 but you're saving at least $7,000 or more in taxes - just multiply the $26k (22k salary to her plus her portion of the employer contribution) by your tax rate and compare. Your wife's employer contribution should be able to get to about $4,400 at that income.

I think its worth it.

I do suggest asking your CPA to run a quick cost benefit analysis as there are always tax considerations that could pop up that a simple comparison can't cover.

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Posted by igoringa

South Mississippi

Member since Jun 2007

11875 posts

Posted on 2/25/15 at 9:13 am to Tigerstark

quote:
So, if my math is correct your "12% penalty" is $2,640 but you're saving at least $7,000 or more in taxes - just multiply the $26k (22k salary to her plus her portion of the employer contribution) by your tax rate and compare. Your wife's employer contribution should be able to get to about $4,400 at that income.

Thanks. The reason I refer to it as a penalty is that if I keep the income under my name it will never be subjected to the 12%. Thus, if I do this, I am paying 12% for the right to defer taxes on this amount (not eliminate).

So to me the math is whether it is worth paying 12% more now to defer income tax for 20+ years.

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