Ken,

SEP-IRA plans can be deceptively expensive!! There is a better, mid-range alternative. Let me explain.

If you have employees, a SEP-IRA is a terribly costly way to gain a tax deduction and save for retirement. Let me illustrate. Suppose you earn $230,000 or more. You want to put in the max $46,000 into the SEP-IRA. You have two employees, one earning $45,000 a year and the other earning $35,000 a year. Into the SEP-IRA, you'll be putting into the SEP-IRA for one $9,000 and for the other $7,000.

Using a cross-testing 401k you could likely cut that $16,000 a year cost in required contributions for your staff to just $4,000. It depends on factors such as age and so forth, but as you can see, the savings could be $12,000 a year.

Zip Code: 83402

Beware of 412i plans that the "springing" value in the life insurance policy is more pronounced than what commercially sells outside of 412i plans. The IRS vigorously attacks the exaggerated springing value 412i plans as a listed transation. You can even get hit with extra penalties for not reporting yourself to the IRS for trying these.

Zip Code: 83402

Hey, Ken,

The federal tax laws gives a person who might be eligible for both a 403b and a 401k a single $15,500 limit per year ($20,500 if age 50 or over by 12/31 of the year). You cannot double up in a 401k you might have.

In a 401k, you could do 20% of your self-employed income, up to $46,000 total.

But be careful. It is quite tricky to make sure you can have a 401k even with your separate LLC income. As a hospital-based physician, it is possible--but there is a facts-and-circumstances test that applies, that looks at many factors including how much authority you have to direct other hospital employees in how they perform their work.

One thing you should check out is whether the hospital also offers a 457b plan. Between the 403b and a 457b plan, you could double up--$31,000 a year (or $51,000 a year if age 50 by 12/31 of that year).

The downside of a 457b plan is if the hospital should ever go insolvent (remember Orange County, CA in the 1980s and the City of New York in the late 1970s both went insolven). If so, you'd lose most of your 457b benefits--unless the University of Pennsylvania is publicly owned. Then your benefits would be better protected.

Zip Code: 83402

All good food for thought. Since I am currently the only employee of my LLC, and I don't think U of Penn. will ever go bankrupt (the Hosp. of the U. of Penn. is a different story but I am now technically employed by the Univ. not the hospital), for now I think the SEP-IRA is the easiest solution. As I get older or if I end up hiring other employees, I may consider something else up.

Ken,

You ought to obtain a legal opinion before doing the SEP-IRA for your LLC that as a hospital-based physician, that SEP-IRA would not have to cover also the hospital's employees.

Zip Code: 83402