What is the best strategy to maximize a 401(k) if I have wages from a job and income from an LLC?

by Timothy C. Hilbert, CPA | Jun 22, 2018

I have wages from a job and income from an LLC (S corporation filing). Gross profit from the LLC will be $40,000, with expenses of $11,000. Wage is roughly $14,500. Employer wages will be roughly $200,000. What is the best strategy to maximize my 401(k) from employer and LLC (S corp)?

The maximum allowable 401(k) deferral for 2018 is $18,500. The maximum is fixed and cannot be exceeded, even if the employee has more than one employer.

The facts provided are not sufficient to know whether or not you are considered a highly compensated employee (HCE) in your job. HCEs might fall into a measurement limit under actual deferral percentage/actual contribution percentage (ADP/ACP) testing, which limits the amount an HCE can defer compared to the amounts (percentages) that nonhighly compensated participants defer.
The query is also not specific on whether the LLC is owned solely by you or whether the entity has other employees who might have to be covered by a plan.

Generally, though, if there are no limits due to ADP/ACP testing, on the deferral at the employer where wages are $200,000, and if there is a reasonable match by that employer, it would make sense to maximize the deferral at the full $18,500 where the $200,000 is earned so as to obtain the match from that employer, thereby enhancing the amount funded to the 401(k) plan. Also, you do not indicate whether you are over 50 and can participate in catch-up contributions.
There is a single limit for allowed deferral, irrespective of how many employers an individual has.

The overall addition limit to an individual’s retirement account for 2018 is $55,000 ($61,000 if over 50). The person can make a nonelective contribution to a plan established by the LLC and that contribution, as long as the plan document is written correctly, can be up to $55,000 since it is nonelective and because the overall limit applies separately to each plan. As noted previously, there may be practical considerations at the LLC if there are other employees who might be participants in the LLC plan.

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Answered by: Timothy C. Hilbert, CPA, is a director of audit and accounting and professional services industry group leader with Kreischer Miller in Horsham, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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