I just switched jobs and need to decide between SEP and 401K. From Jan to July, my W-2 income was 180K. I maxed out my 403B at $16,500. Now, I have a new S-Corp and estimate the earnings from Aug to Dec to be 85K. In order to maximize my retirement savings, should I establish a SEP or 401K account? What's the maximum I can contribute given that I already have a 403B? Is this amount calculated as 20% of the wages I have paid myself from the S-Corp?

Zip Code: 92708

That's great that you're making every effort to max out your retirement plan contibutions this year.

Since you have already hit the $16.5k of salary deferrals through your other employer this year, the amount you can contribute into your S-Corp's retirement plan is limited to 25% of the salary you pay to yourself through the S-Corp this year - regardless of whether you set up a SEP or a 401K plan for your new practice. For 2010, the maximum retirement plan contribution a practice can make on behalf of an employee, including salary deferrals, is generally limited to $49k this year for most plans.

The key issue is that the amount you can ultimately contribute to the retirement plan maintained by the S-Corp is a function of the wages you pay to yourself during the year. S-Corp profits and S-Corp distributions do not count towards figuring your maximum annual retirement plan contribution.

Going forward, the 401k plan might help you hit the annual maximum by taking a lower salary from the corporation. To hit the $49k max, you would need to take a salary of $196k if you have a SEP versus $130k if you set up a 401k since the 401k allows for salary deferrals.

There are a few other considerations to keep in mind. If you have employees, you need to put away an equivalent percentage of your staff's salary into the retirement plan that you put away for yourself for each staff person that qualifies to participate in your plan. Most practices with staff end up implementing a 401k plan for this reason, since the first $16.5k that you put away for yourself is considered taken out of your salary and, therefore, not paid on your behalf by the practice. (If you have staff, you should definitely seek out the advice of a Third Party Administrator - TPA - or a retirement plan consultant.)

And if your spouse does not currently work, or works but does not have access to a retirement plan thorugh that employer, then your spouse can work at your practice, and get paid enough to be able to max out his or her salary deferrals of $16.5k. An annual salary of $18k would be sufficient to have your spouse put away $16.5k through salary deferrals after withholding social security and Medicare taxes on that salary.

Finally, I'm assuming you are under the age of 50. If you are 50 or older by 12/31/10, you would be able to put away an additional $5.5k this year with a 401k.

Zip Code: 01801