Expert: Allen - 12/3/2008

Question
QUESTION: I have 2 small businesses. One is a small web design firm (llc / sole prop) and I use profits from that to fund my ROTH. Then I have a lawn care company, with myself, my wife, and one other non-family member as employee. currently, we have a SIMPLE - My wife and I contribute 10,500 each plus the "company" contributes its 3% - my employee does a simple 3%/3%.  
  
I have been agonzing over whether or not it's worth the time and expense to setup either a 401k or ROTH 401k -- my wife and I had an inheritance, so we're using our SIMPLE to "move" that inheritance into our retirement plan as quickly as possible (moving figuratively -- we live off that inheritance while we're putting 100% of our paychecks into our simples, then once we reach max cont. we begin livign off our paycheks again). I get 23k -- she gets 11k for annual pay. My employee makes around 21k.
 From what I understand, if I adopt a 401K, I could
1. wife and I could each put 15,500 emp. deferral (vs. 10,500 for SIMPLE)
2. we could set the company contribution anywhere we want from zero to 25%?? (that's where I get a little gray)
3. my employee could STILL do 3/3 but all 3 of use would have to have the same company contribution, correct?? so if decide to give US 10%, we have to give him 10% ....
Am I on the right track in my understanding??

Basic underlying question is ... do you personally think the extra tax benefit is worth the 1,000 per year give or take in costs (my SIMPLES cost zero!!). especially since I would rather personally pay the taxes NOW and have the ROTH 401K ....
Thanks ever so much!
By the way, if you see ANOTHER alternative that I have NOT thought of, please let me know.
Ken

ANSWER: It may be worth the extra tax benefit. However in order for me to give you a good answer I would need to know the ages and approximate annual compensation for you (from both businesses), your wife and your employee.
As far as item 3 there are possible plan designs that would allow you to contribute a higher percentage of pay for yourself than you would for your employee. In order to let you know if this is possible, I would need the age and compensation information.

---------- FOLLOW-UP ----------

QUESTION: Thanks Allen: The info you asked for is;
The S corp lawn care company pays me 23k, my wife 11k and my employee approx. 20k -- i am 43, she is 42, he is 37 and has been with me 16 years plus.

The web design firm doesn't actually pay anything. It grosses 30-35k and "nets" about 10k. I use the "profit" from this to fund my ROTH, and otehr investments, but it is a sole prop and I do not use it to pay any wages.

Answer
Sorry for the delay in getting back to you.

One general comment. A SIMPLE is supposed to be adopted by all companies that have common ownership. Therefore your web design firm should have adopted the plan. This doesn't increase the $10,500 that you can contribute. But it will increase the 3% match slightly.

Right now you are looking at net income of $33,000 for you, $11,000 for your wife and $20,000 for the employee. It sounds like you are currently contributing to the SIMPLE ($10,500 + 3% of $23,000 =)$11,190 for you,(This should be a few hundred dollars more when you take into account your net income from the web design firm.) and ($10,500 + 3% of $11,000 =) $10,880 for your wife. The total contribution for your family is therefore approximately $22,000 and you are paying income tax on $12,500 of income for you from your main business, $500 for your wife from this business and $10,000 for you on the sole proprietorship. With taxable income of less than $25,000, you are probably in a low tax bracket. I therefore don't think it makes sense to incur the costs for establishing a 401k so that you could contribute more. It's not just the cost to set up the plan. You will also have to pay something each year for preparing the forms that have to be filed with the government.

Since you are in a low tax bracket, contributing to the Roth makes sense. You may want to consider increasing your wife's pay so she can also make a Roth contribution.