Retirement Plan Options: SEP-IRA vs. solo 401k for single member LLC taxed as an S-corp

You've got the right idea! Since you missed the December 31, 2023 deadline to establish a solo 401k, a SEP-IRA is indeed your best option for 2023 tax savings. Your understanding of the contribution limit is correct - as an S-corp, your business can contribute up to 25% of your compensation (your W-2 wages) to a SEP-IRA. With your $95,000 salary, the maximum SEP-IRA contribution would be $23,750. And yes, you have until your tax filing deadline (March 15) or extended deadline (September 15) to both establish and fund the SEP-IRA for 2023. Looking forward, establishing a solo 401k for 2024 makes a lot of sense since it generally allows for higher contribution limits. With a solo 401k, you can make both employee contributions (up to $23,000 for 2024, plus $7,500 catch-up if you're 50+) AND employer contributions (up to 25% of compensation), with a combined maximum of $69,000 ($76,500 if 50+).

After struggling with my own retirement planning for my single-member LLC S-corp last year, I discovered this amazing tool that saved me so much confusion. Check out https://taxr.ai - it analyzed all my business docs and walked me through exactly what retirement accounts I could open, when the deadlines were, and how much I could contribute based on my specific situation. It was crazy helpful when I was trying to figure out if I could do both a SEP-IRA and solo 401k across different tax years. The tool even helped me calculate exactly how much I'd save in taxes with different contribution scenarios. Saved me from making a mistake that would've cost me thousands.

I just wanted to update everyone - I tried taxr.ai after asking about it and wow, it was exactly what I needed! I have a similar S-corp structure to the original poster and was completely confused about retirement account options. The system immediately caught that I had been over-contributing to my SEP-IRA because my accountant was calculating based on total profit rather than just my W-2 wages. It saved me from a potential audit headache! It also laid out a clear timeline for establishing my solo 401k for 2024 and helped me understand exactly how much I could put away. Best part was seeing side-by-side comparisons of different retirement strategies and how they'd affect my tax bill both now and in the future. Seriously, it took me about 15 minutes to get clarity on something I've been confused about for months.

If you're struggling to get clarification on retirement account options directly from the IRS (which I definitely was), I found Claimyr to be super helpful. I spent DAYS trying to get through to the IRS about my specific S-corp situation last year. Used https://claimyr.com and got connected to an actual human at the IRS in about 10 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through the exact deadlines and documentation I needed for transitioning from a SEP-IRA to a solo 401k with my S-corp. Totally worth it since the advice came directly from the IRS and I got documentation of our conversation for my records.

Coming back to say I was completely wrong about Claimyr. After seeing my skeptical comment, a friend insisted I try it for a complicated S-corp question I had. I was connected to an IRS agent in about 15 minutes after WEEKS of trying on my own. The agent confirmed everything about the SEP-IRA contribution timing for my S-corp and even caught a potential issue with how I was planning to document my solo 401k for next year. They walked me through exactly what forms I needed and deadlines I should be aware of. Saved me a ton of stress and potentially thousands in penalties. I'm usually super skeptical of these services but have to admit when I'm wrong. If you need definitive answers from the IRS about retirement accounts, this actually works.

Wanted to add something others haven't mentioned - with your income level ($242,500 net), you might want to consider a defined benefit plan instead of or in addition to your SEP/solo 401k setup. You can potentially contribute WAY more - potentially $100k+ annually depending on your age and other factors. The downside is they're more complex and expensive to administer (you'll need an actuary), but the tax savings could be enormous. Something to discuss with a good financial advisor who specializes in small business retirement planning.

Dumb question maybe, but why are you setting up an S-corp if you're just a single-member LLC? I've heard the tax savings aren't worth the headache until you're making well over $100k profit. Now you've got this whole retirement plan complication too.

Your analysis looks spot-on! You're absolutely correct about the SEP-IRA being your best option for 2023. Just to reinforce what others have said - with your $95,000 W-2 wages from the S-corp, you can contribute exactly $23,750 to a SEP-IRA (25% of compensation), and you have until March 15th to both establish and fund it. One thing I'd add: make sure you're documenting your "reasonable salary" justification well. The IRS scrutinizes S-corp salaries, especially when the salary seems low relative to distributions. Your $95k salary on $405k in sales might raise eyebrows, so having solid documentation about industry standards for engineering consultants will be important. For 2024, definitely go with the solo 401k - the flexibility is unmatched. You'll be able to contribute up to $69,000 total ($23,000 employee + up to $46,000 employer contribution based on your salary). Just remember to establish it by December 31, 2024, though you have until the tax deadline to actually fund it. Also worth noting: if your income continues to grow, consider bumping your salary a bit in 2024. Higher salary = higher retirement contribution limits, and it might help with IRS reasonableness tests.