Investing Dilemma

[shainy]

I am a silent reader of this forum and learnt a lot from the fellow members on lot of things. Now I need your advice and opinions on the dilemma I am having right now.

Brief Introduction:

We are dual income couple making little above $300K. We work for own corporation and have our individual 401k set up with Vanguard. We can contribute up to $52k for each of us between employer and employee contributions. We both are the only employees of our corporation.

Here is the dilemma:

We are paying ourselves reasonable salaries as per the industry norms in our sector. There is a profit of around $140k after paying ourselves.

As of now we both are maxing out our retirement accounts and making matching contributions from the employer side( from the profit). I see that FICA taxes are paid on employee contribution and employer contribution. This amount to 15% roughly. If we have to take out the profit without any 401k contributions from the employer side, we end up paying 15% tax for the profit.

What do you think is the best way to invest the profits in the long run?
1) taking out the profit distribution by paying 15% tax and investing it in the taxable account
2) contributing max to 401k from the employer side thus reduce the overall profit/income.

We do not have any plans to R2I as of now if it helps to know.

Thank you for your time and advice in advance.

-Shainy

[netizen11]

I am a silent reader of this forum and learnt a lot from the fellow members on lot of things. Now I need your advice and opinions on the dilemma I am having right now.

Brief Introduction:

We are dual income couple making little above $300K. We work for own corporation and have our individual 401k set up with Vanguard. We can contribute up to $52k for each of us between employer and employee contributions. We both are the only employees of our corporation.

Here is the dilemma:

We are paying ourselves reasonable salaries as per the industry norms in our sector. There is a profit of around $140k after paying ourselves.

As of now we both are maxing out our retirement accounts and making matching contributions from the employer side( from the profit). I see that FICA taxes are paid on employee contribution and employer contribution. This amount to 15% roughly. If we have to take out the profit without any 401k contributions from the employer side, we end up paying 15% tax for the profit.

What do you think is the best way to invest the profits in the long run?
1) taking out the profit distribution by paying 15% tax and investing it in the taxable account
2) contributing max to 401k from the employer side thus reduce the overall profit/income.

We do not have any plans to R2I as of now if it helps to know.

Thank you for your time and advice in advance.

-Shainy

I am no expert in corporate taxes. You should consider discussing with CPA> Other members may be of more help..


It seems you have S-Corp or LLC. Regardless, if your profit distribution after paying reasonable wages is taxed at 15%. It does not make sense to contribute max in 401K if the choice is contribute to 401K or take out corp profit distribution at 15%, as likely at 59.5 on taking distribution from 401K your income will be taxed at >15% rate.

[ashleyjohnson]

Investing is usually done in an effort to have money to accomplish life goals and realize dreams. Knowing we have money for the future can offer a sense of peace in the present. However, instead of bringing peace of mind, investment decisions are often complex and confusing, leading to overwhelming feelings such as distress, worry, and anxiety.

[seekay]

Here is the dilemma:

What do you think is the best way to invest the profits in the long run?
1) taking out the profit distribution by paying 15% tax and investing it in the taxable account
2) contributing max to 401k from the employer side thus reduce the overall profit/income.

-Shainy

I have a similar situation except that it is only me working in the business, so I don't have enough to contribute $52K for both me and the spouse :). If I could, I would.

For me, I try and max out 401(K) as much as possible instead of taking the excess into my taxable account. (There are many folks who discuss pros/cons of tax rates now vs that expected in retirement and honestly no one knows.)

Here's why:
- Maxing out 401(K) means a lower marginal rate today. Note that by not doing this, yes you will pay the FICA for what you take as net income, but you may very well bump yourself up into the next marginal tax bracket. That means more of your money will be taxed at a higher rate today.

- There are strategies to minimize taxes on RMDs and withdrawals from your IRAs and 401(K)s when you retire. For example, you may only choose to withdraw what you need, and continue to invest the rest. If house is paid off, kids college is done, you may not need as much as you do now for travel + volunteering + gifts to kids/grandkids. So there is a possibility you may be in a lower tax bracket now than later.

- Between now and then, more money in the 401(K) = more for it to grow. This is 15% more for FICA + the hit to your marginal taxes.

In short, my suggestion would be to continue doing what you are doing right now. For years you anticipate a large expense (e.g. a house downpayment), you could skip the employer contribution to the 401(K) and resume it the next year. It won't be the end of the world in either care.

[shainy]

Thank you every one for taking time to reply to my query. Appreciate your input.

seekay - Right now we are contributing max to 401k just to lower our tax bracket. Without that, we will be in a higher tax bracket than what we are now. But at the same time bit worried that most of the savings are tied up in 401k. I am not sure if it is the right strategy,hence wanted to with the forum members in the same boat to see what they are doing. Thanks for your response.

We are also contributing to 529 accounts. Our goal is to contribute $100k for each of the children and we may be done with it in the next two years.