I’m a partner in a small business. The partners are treated as W2 employees and we take partnership distribution when we can.
Until this year we had no retirement plan, and I’ve been contributing to a rollover traditional IRA yearly. I also have a Roth IRA.
In 2023 we’re offering a 401(k) for our employees including partners.
Because we’re using a PEO it looks like we can choose either a traditional 401(k) or a Roth 401(k) to contribute to.
I tried to do my own research on tax ramifications and contribution limits, and I think I see that I can contribute to both the 401(k) and the IRA I have, but I’m unsure of the tax implications and I don’t know whether I should pick the Traditional or Roth from the company plan. It got…convoluted.
My husband and I file married filing separately.
I asked my tax person but she hasn’t gotten back to me yet.
Would any of you smart folks be able to help me figure this out?
First question. Is this a partnership or a corporation? (If it’s an LLC, is it taxed like a partnership or a corporation?) You either have a terminology mix up here or a real tax problem.
This makes it critical to get the partnership/corporation question answered.
You can certainly contribute to both. The question will be whether the IRA contribution is deductible or not.
That means your IRA contribution will almost certainly be non-deductible. (I’m going to assume you make more than $10k a year at this business. If not, we can revisit the deductability question.)
Probably. But let’s start with the type of entity question first.
In the world of possible responses to my type of entity question, yours was one I was not expecting. I was kind of hoping someone else would jump in with some thoughts. But that hasn’t happened, so I’ll carry on.
I seem to recall that there are some unusual situations where an entity that is legally a partnership can be taxed like a corporation. But those are extremely rare.
My concern is that a partner in a partnership should never receive a W2. They get guaranteed payments and their share of profits (or losses), both of which are self employment income. That income would be reported on a K-1 from the partnership.
In the real world, I’ve run into a couple of situations where partners did get a W2. That is still wrong, but as a practical matter it doesn’t make a difference until benefits enter the picture. And that’s where you are at the moment. A 401k plan is an employee benefit.
You are talking about a partner in a partnership making contributions to a 401k plan. Since a partner should not be getting a W2, there would be no basis for making those contributions. So the W2 issue becomes very important to solve.
My best suggestion would be to talk to the accountants for the partnership and ask questions of them about why you are getting a W2 in the first place. If you truly are a partnership being taxed like a corporation, the W2 is correct. But that situation is so unusual that it makes me question everything.
My spidey senses are telling me that there is something lost in translation here. And I want to be sure that is clarified before moving on.
Thanks Peter. I didn’t realize we were in a unique situation
We’ve been working with the same tax professional for a number of years. She’s an Enrolled Agent and suggested that we structure the taxing this way. I’ll see if she has some time for me.
Some lawyer partnerships have–as I understand it, hazily anecdotally–equity partners and non-equity partners. In that arrangement, it seems that equity partners cannot be fired, for instance, when the market goes bad, and the partnership can no longer afford them, but the “regular” partners can be fired. Might that apply here?
Eric Hines
