Thursday, December 07, 2006

An extra $1200 to the government and maxing out my 401k contributions

Well after receiving some nice links from Owtobahn, it looks like I'll need to make payroll tax payments on the salary deferal component of my individual 401k contributions I make through my privately held company.

I figure my new employer will cover about 40-50% of my aggregate salary deferal contribution limit to 401ks (defined contribution plans) ($15k), the balance will have to be made through my privately held corp's individual 401k. Self-employment tax adds about 15% (payroll tax times two for social security tax component). It's unfortunate, but a necessary approach to obtain a future tax benefit.

I wonder if you calculated things out, if I'd make back the 15% in over the next 30 years? I assume the capital gains deferal will exceed the 15% cost.



Anonymous said...

Not sure what you are doing but also a 401k converts all earnings from the lower LT CGT rate to higher (presumably) regular income rates, albeit deferred many years. If making a contribution avoids income tax but somehow gets hit with the 15% self employment tax then maybe this isn't any more a good deal (besides reducing the liquidity of your assets).

Anonymous said...

PS - you should do a projection in a spreadsheet to work out the implications.

makingourway said...

moom - it's an interesting point - sheltering the capital gains until retirement and paying income tax vs. taking the hit right away and enjoy the lower capital gains tax.

I'd prefer the 401k benefit for an additional reason - asset protection. If we continue in our current trajectory, we'll have quite a bit of money in sheltered accounts and outside of it. In our litigous society - that seems to attract lawsuits. Better to have the money benefitting from ERISA protections via a 401k - especially since my wife is an executive in health-related industries.


Tom said...

As long as you pay yourselves salary out of your own company, you have to pay payroll tax. It has nothing to do with whether you defer to solo 401k or not. Unless you are saying you are paying yourselves salary for the sole purpose of deferring them to solo 401k, the payroll tax is not a penalty or cost for the solo 401k contribution.

The Finance Buff