Prospective client who is age 72 and trains horses. His schedule c net income is $60,000. Accountant and myself are trying to determine best retirement vehicle for him. I understand he is limited to the TEFRA factor or 20%. Would that be his only available deduction($12,000)? Could he possibly put in more with a 401(k) which in this case i believe is called a Uni-K for 1 part. sole proprietor? What's to keep him from deferring $12,000 plus the $2000 catch up and then doing some sort of match/profit sharing? Could he do it and just not get a deduction? Also, he would be subject to the RMD's as well, correct? Did I provide enough information? Thanks

Best plan is a DB. With prior earnings history may be able to deduct entire 60k (or thereabouts).

Between the 401(k) plan and the profit sharing plan, the better choice would be the 401(k) plan I if t.

With the profit sharing plan, he is limited to 20 percent of his ANBI ( only $12,000) profit sharing contribution

With the 401(k) plan, he may contribute

$12,000 salary deferral
$2,000 catch-up
$12,000 ($60,000 x 20%) profit sharing contribution

In both cases, he is able to deduct the $12,000 ($60,000 x 20%)


No RMD would be required for this year, because there is no prior year FMV

Thanks for your replies. Probably the DB would be more costly from an administrative stand point i.e PBGC, Actuary. Could the 401(k) also accomodate a matching provision? Perhaps? Thanks again.

If he has no employees, the PBGC won't be involved. I guess getting an extra $30k or so in deductions might be worth an uptick in adminstrative expenses, maybe even worth having to deal with an actuary. (shudder). But I might be wrong.

The 401(k) plan for the small business owner, such as the one you described above, generally do not include a matching provision- only salary deferral and employer profit sharing. ... Why would you want a matching contribution…considering the 25 % deduction limit can be met with pure profit sharing contribution

It is my understanding that the plan can be drafted so that the required minimum distribution will not be applicable for 5 years.

Pax, if a plan is covered by the sole owner and is obviously top heavy, wouldn't that require you to use a 3-year cliff vesting schedule. I don't know of an exception to having a non-TH vesting schedule for key-only plans.

Blinky- you lost me on this one. If we are talking about the same type of 401(k) plan from the original post, then the plans are usually drafted so that contributions are immediately 100% vested….

Also, if the plan covers only the business owner, why would top heavy status be a consideration?

I am just referring to pax's comment regarding the drafting of a plan to prevent minimum distributions for 5 years. To do so, one would have to have a 5-year cliff vesting schedule and exclude years of service for vesting prior to the effective date of the plan.

But my question was that if the plan is TH, then you cannot have a 5-year cliff vesting schedule, but must have no more than a 3-year cliff vesting schedule. I don't know of an exception to this rule just because the plan covers only the owner.

The original post requests the best plan, but doesn't specify a 401(k) plan. Now, obviously, if there are 401(k) dollars, they are 100% vested. But, I am an actuary, so I say GO DB!

IT APPEARS THE 401(K) WOULD OFFER THE MOST FLEXIBILITY AND WITHIN A COUPLE THOUSAND DOLLARS ANNUAL ADDITION OF THE DB. FINAL QUESTION IS WOULD HE BE ABLE TO DEDUCT BOTH THE P.S. CONTRIBUTION OF APPROX. $12,000 AS WELL AS THE $12,000 DEFERRAL ON HIS 1040? CATCH UP'S ARE NOT DEDUCTIBLE, CORRECT??? THANKS.

He would be able to deduct all of it, his $12k deferral, the $2k catchup and the $12k employer contribution.