Mark Kohler explains why maxing out your 401(k) at $55,000 might not be the best move for S-corp owners. He walks through the math on salary versus contributions, shows how a spouse's 401(k) can double your savings, and argues for balancing retirement accounts with other investments.
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Hi, my name is Mark Kohler and I'm a CPA attorney and small business specialist in saving taxes, protecting it and building wealth. Now here's my point. It's a pretty bold statement to make a title of this video. The sweet spot for a 401k is not $55,000. Because I know many of you believe, oh I got to do 55 grand. That's why I'm doing the 401k. Let's think twice. Okay? Now why I say there's a sweet spot is because of one word, the F word. Fica. That's right, because you're going to be paying a ton of FICA to get to $55,000 and maybe we don't want to pay that much self employment tax to get the contribution of the 401k and we can think more creatively. Let's go through an example. So let's say you've got your S corp here, which is where you're going to be if you've got self employment income and you're going to be funding a 401k. Now this 401k is this little bucket over here on your asset side. This is for those of you that watch my videos. Please get over and subscribe and watch more of them. You're going to see that operations are over here, assets are over here. This is where your rental property and your investments are. Your trust is down here, your home, yada yada. There's a trifecta that you want to try to bring together this whole plan. But over here is your 401k. Now example one is that you say I want to maximize my $55,000. Well in order to get to 55, you're going to do $18,500. Now I'm assuming you're under age 50 so you can play with these numbers, but you're going to do 18,500. Well to get up to my 55,000 it's got to be 25% times my salary to make up the difference. Well, to get to the $55,000 the Plug, your salary is going to have to be around $160,000. Oh my gosh. Do you know what that's going to run you in? Self employment tax, it's going to be over $20,000 in self employment tax closer to 21. That's a big deal. So if I'm going to take this huge salary and pay biggest self employment tax, I'm thinking I'm only doing this to take $55,000 in 401k contribution deductions. Now, depending on what your net income is, you might be forced to take $160,000 salary. So that's moot. Meaning it doesn't matter because you're like mark, I got to take a huge salary because of my income level. Well, as many of you know, with my payroll matrix and S Corp strategy, I may not want to take that biggest salary or may not have to. So let's come up with option two. I'll do it in red. Option two is, well Mark, I'm still going to do my 18,500 but in my business I'm netting around 200 grand and I could thereby take a $70,000 salary. And you're darn right I'll stand behind that. I could take a $70,000 salary, save on self employment tax and only pay 10,000 in self employment tax and then do 25% of my 70 and I can get up to $36,000 in my 401k because my salary is 0.25 times 70 grand. So I created $10,000 in savings and I still get 36,000 in my 401k. But you say, well Mark, I want to put away a ton of money. Well, you've got to start saying am I going to really pay 10 to put away this extra 20? I mean really, the net cost is I'm only up 10. And I mean, I don't know, you have to do the math, right? Here's an other idea that you might like is bring your spouse into the mix. If you're married, not all of you are, I get it. But if you're married, I can put my spouse in the mix for maybe 20 or 30,000. With my wife, I might put her in here at 20 grand in salary, put 18,500 into her 401k and then do 25%. Look it, I'm up to a $23,000 contribution approximately and I'm into this now what I got up to $59,000 but I did it on less payroll. And see this is a big deal. This because I can be building a 401k bucket for my spouse and me, get up to 55,000 or more but not be paying self employment tax to get there. Now I know I'm just generalizing some of these numbers and your salary level is going to depend on your business and whether you're single or married. But what I'm saying is don't just believe in the mantra that I got to do 55 grand on my 401k just because I can do it. There's a sweet spot. Meet with your accountant, talk about your payroll level, look at your overall net income, look at what you want to contribute. Maybe I should be pulling out some of this money and investing it outside of my 401k and finding a balance with rental property outside of my 401k. And in my 401k. See, there's all these other options too many of my clients just get fixated on, oh, I can do 55 grand. I'm going to do 55 grand. Some accountants out there push their clients into that bucket or that mold and it's not for everybody. So there's a sweet spot. Run the numbers, find what works best for you, and use the 401k to your advantage in combination with the S Corp salary planning strategy. Good luck folks. Keep living the dream. Thanks so much for watching that video and I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web on Google trying to find answers to complex questions and just click clicking a mouse hoping you got it right. My team and I want to be a huge resource to you, the law firm, accounting firm, my education resources on my site. Please continue to follow these strategies. I know they'll save you thousands now click here if you want to be a part of my newsletter. It's awesome. Weekly updates and deadlines and strategies and tips. Also subscribe to my YouTube channel. You'll love it. And make sure to click the bell icon so you get a little ping whenever there's a new video. And finally, check out my site marcjkohler.com with all sorts of videos, probably 70 plus videos that 30 plus hours of content that'll save you thousands of.
