Looks like you've gotten it all figured out.

Here's the problem I'm having with IRAs: I'm now age 70, and looking
at my Minimum Required Distribution on my IRAs and other
tax-advantaged investments. I hate it! I've gotten my income
(pension, social security, and investment interest and capital gains)
down to where the taxes are reasonable, and now I'm hit with having to
pay taxes on this additional income from forced IRA distributions.

I know, I've deferred off the taxman until now, but I still hate
having to pay the taxes at a time in my life when I'd prefer they'd
just leave me alone.

If I were in your shoes I'd go ahead with your plan BUT for each IRA
investment I make, I'd convert to a Roth on the following year (I
don't think there's a limit on conversions because of high income).

I wish I had done it. Now I'm going to do it as quickly as possible.


On Thu, 20 Nov 2003 10:44:08 CST, "Sgt. Sausage" <nobody[at]nowhere.comwrote:

- quote -

- quote -

Thanks again to everyone for all the input.

I've spent the last several days wading through IRS pubs
and the internet and have determined that both my wife
and I can fully fund individual IRA's (separate from our
401k accounts) up to the normal limits. I've run the
numbers and it makes sense.

Here's the deal -- we can contribute the max to the new
IRAs, but the contributions are non-deductible. (bummer)

The good news is that the gains grow tax-free until
we pull the funds out. Based on the amount we'll be
investing, our current tax rates, our assumed rates
of return and our best guess at the inflation rate, I've
run a spreadsheet model that shows that this is a good
route to go if we plan on sticking with it for at least
8 years. Prior to the 9th year, if we need the money
and have to pull it out early, then it's a losing proposition
because of the penalty for early withdrawal. After the
9th year, the extra gains that are not taxed begin to
more than offset any penalty for early withdrawal.

One caveat -- there's a minimal amount of paperwork
the IRS requires (form 8606) for funding an IRA in a
"non-deductible" maner. It's a single form, and it's
pretty easy to fill out every year.

I'll also have additional admin come withdrawal time
as the original money went in with taxes already paid
so there's some figuring to do when pulling it out. I'll
only have to pay taxes on the gain, not the money I
initially put in.

Based on the model spreadsheet I built, I think
this is a definite "no-brainer" as it results in
significant extra gains as the years go by because
the gains are not taxed until withdrawal.

Not quite as good as the Roth that I'm not
eligible for, but good enough that I'm going
ahead with it.

Sandra Loosemore <sandra[at]frogsonice.com> wrote in message news:<m3sml239br.fsf[at]dartfrog.localdomain> ...

- quote -

The IRA is a good deal even if your income is too high to postpone
taxes. The lower tax rate on dividends is a good deal, but there
aren't enough high dividend stocks that are eligible for the reduced
dividend tax.

--
Ron

BMS wrote:

- quote -

A defined benefit plan *might* work (either a 412(i) or a
trust one), but the makeup of the workforce will have a
major impact on that issue. A larger, older workforce with
a younger owner is the "worst case" scenario for a defined
benefit plan. The best case is an older owner with no
employees (or at least none that would be required to be
covered).

--
Ed Zollars, CPA
Phoenix, Arizona

Brent D. Gardner, ChFC wrote:

- quote -

It depends--as always, it's a cost/benefit issue. If the
facts are right (and I've not checked back to see what all
of those are in this case), the "esoteric" option may not be
that involved or expensive. But if you are looking for
$30,000 of deferral that does do more to limit options than
if you are looking for a more substantial amount to be put
away. So the "tipping point" may arrive earlier and after a
quick once over it may be clear that getting fancy in the
qualified plan arena may not work.

But all options have costs and benefits of various sorts
that have to be considered.

--
Ed Zollars, CPA
Phoenix, Arizona

Tad Borek <borekfm[at]pacbell.net> wrote in message news:<67gqb.24179$5a5.23068[at]newssvr27.news.prodigy.com> ...
- quote -

I noticed that he was a business owner, which is why I nixed the idea
of setting up extra companies. Gee, if that worked, everybody would
have already done it! Yeehaw. The IRS & Congress are smarter than we
give them credit, even though they make dumb mistakes. =)

I know some pension consultants that do some creative planning that
allows for some rather esoteric massaging of a plan to allow for some
'legal' discrimination, but a guy wanting to sock away $30,000 doesn't
need that kind of help. The annuity, or a life policy, or combination
of both, would probably solve the problem, without creating too much
expense. The problem both of these products have is their reputation
among those who haven't graduated to the upper echelons of affluence
yet. Some of the target market for ALW/PFS has has their minds
poisoned to the point where nobody can help them, IF they get lucky
and rise above the rest who are living paycheck to paycheck.
Fortunately, the majority of those that I call on are open minded
enough to listen and learn when they have the same problem as the
author of the original post.

John Weeks is merely repeating what some lay people believe - that one
can cheat and get away with it. Politicians fuel this fire with every
campaign, telling people that corporations are getting rich and the
poor are getting poorer (how can one be less than broke?). I've seen
how some small minded small business owners have gerrymandered their
organization in an attempt to evade taxation. A relatively common
approach is 'outsourcing.' I see this a lot among restaurants,
convenience/grocery stores, and bars - businesses with lots of cash
flowing through (or under) the register. They pocket the cash, and
then try to avoid paying taxes on what they have to report (credit
card receipts, deposited checks). One business I evaluated showed a
loss for several years, yet the owner claimed to take about $80,000
out per year - allegedly tax free. How? He 'outsourced' everything
under the sun - trash collection (moving it from indoors to outside in
the dumpster!), security, clean up crew, plumber, electrician,
accounting, tax prep, etc. Of course, the owner was all of these
entities, and he could produce receipts for payments to all of them
(many made with cash!). Fortune 500 execs don't have a corner on the
creative accounting racket.

That's why I called it poor advice. It is a recipe for disaster.

Look into a define benefit plan, like a 412i

"Sgt. Sausage" <nobody[at]nowhere.com> wrote in message
news:3fa8fefe$0$60174$a0465688[at]nnrp.fuse.net...
- quote -

John A. Weeks III wrote:
- quote -

That probably wouldn't work - it'd be hard to argue that's a separate
employer (fully controlled, fully owned business). Remember you need a
"separate employer" to make it all work and common control is a problem.

Actually I'd missed that the poster is the (sole?) owner of the business
with the SIMPLE and that presents some problems. Depending on the whole
story that could put limits on what you'd be able to do with a
second-biz SEP anyway (back to Brent's point about global plan limits).
It may be possible but you'd need to avoid the common-control issues.

Maybe the real point though is that the company's plan has been outgrown
& it's time to revisit that whole topic. Best idea would be to get some
professional help, there are many more options out there and this isn't
simple stuff.

-Tad

In article <Zfcqb.24151$eB3.23905[at]newssvr27.news.prodigy.com> , Tad
Borek <borekfm[at]pacbell.net> wrote:

- quote -

I disagree. It is called "outsourcing", and every major company
does it. It is just as easy for a small company to do it. Find
some business activity that you do, and move that to the new 2nd
company.

For exmaple, book keeping and accounting. Have this 2nd company
charge fees to the first company to get its cash flow and revenue.
If nothing else, charge for your time as the CEO. Have yourself
put in the 2nd company, and change a management consulting fee for
providing advice to the 1st company. This is just like a fortune
500 company bringing in Price Waterhouse, except in this case, the
owner owns both sides of the transaction. In fact, if you own any
real estate with your small company, you are nuts to keep the real
estate in the same entity as the small business. One lawsuit not
only wipes out your business, but gets your real estate as well.

-john-

--
================================================== ==================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ==================

"Sgt. Sausage" <nobody[at]nowhere.com> writes:

- quote -

I'm in a similar situation -- maxed out the 401(k), make too much for
an IRA, still have money to invest. I've just been being very careful
about how I invest the money in my taxable account, trying to stick to
funds that take tax management into account and/or have historically
good after-tax performance. To give you some ideas: DODGX, CBTAX,
MUHLX, ARGFX, BRSIX, TAREX, OAKIX. Also a Taxachusetts muni bond
fund.

With the recent changes in the tax laws, I'm not sure that you're
really any better off investing in a 401(k) or traditional IRA any
more, because then all your gains are taxed at ordinary income rates
when you make withdrawals, as opposed to the new lower tax rates on
dividends and long-term capital gains as you go along. You have to
pay the IRS sooner or later, after all.

-Sandra

Brent D. Gardner, ChFC wrote:
- quote -

That's only partially correct...contribution limits are applied across
all of your salary-reduction plans (eg 401k, SIMPLE), aggregating all
contributions. But if you have a second business you can have a separate
SEP, and contribute the full amount to both, blind to the other plan.
Contributions to a 401k from the day job don't factor into your SEP
contribution limits from the side biz. This is the "separate employer rule."

But let's go back to the original question...it's really not feasible
for most people to start a separate business just to create a retirement
plan, so that's not much of a solution. The business would need to
generate income to have any dollars to contribute to a SEP, you can't
just file some dummy corp in Nevada and reap the tax benefits (not
legally anyway). Plus, that additional business income - the 80% that
couldn't go into the SEP - would just create an even bigger tax "problem".

If tax deferral is the top priority, Brent's post goes into the various
options - annuities are probably at the top of the list of candidates.
If you don't want the limits imposed by that type of account, an
alternative is to buy assets that by nature generate low taxable income
each year, such as tax-exempt municipal bonds or investments that leave
most of your earnings as long-term, unrealized, capital gains.
The are treated favorably in many areas of tax - lower income (gains)
tax rates, benefits when donated to charity, benefits when inherited.

The most accessible examples of the latter are broad-market stock index
funds, stocks that don't pay dividends (and aren't expected to - though
these can be hard to identify), and "tax managed" mutual funds. Real
estate could be a possibility as well, though it's of course a much more
complicated an investment than a stock index fund.

-Tad

"John A. Weeks III" <john[at]johnweeks.com> wrote in message news:<051120030859507023%john[at]johnweeks.com> ...
- quote -

This is very poor advice. Plan limits are global, one cannot bypass
them by starting a new business. That is amateur night at the arena
advice - and it is guaranteed to fail.

Leasing equipment to yourself helps avoid FICA and Medicare, but
doesn't solve his problem. It also requires plenty of cash, since
leveraged assets can eliminate the cash flow advantage. That only
helps get money out of a business at the lowest toll. It doesn't help
with discretionary investments for retirement, which is what his
question was about.

- quote -

People who are ineligible for Roth IRAs are still eligible for the
same nonqualified plans that have been around since the dawn of
mandatory wealth redistribution, courtesy of certain pink-pantied
socialists/communists/egalitarians - cough - I mean congress critters.

I have listed those in my response to the original post.

"Sgt. Sausage" <nobody[at]nowhere.com> wrote in message news:<3fa8fefe$0$60174$a0465688[at]nnrp.fuse.net> ...
- quote -

A simple solution: A deferred annuity, variable, fixed, equity
indexed, or all three.

Pro-
- Tax deferred
- Often creditor exempt (a bonus for business owners)
- Often doesn't count against you when you send the kids to college
and apply for financial aid
- Can guarantee growth, or at least the premium paid, even if invested
in the stock market (extra costs for this benefit)
- You can discriminate - no mandatory wealth redistribution
- No mandatory funding
- No limits - pile in the cash!

Con-
- Access prior to age 59.5 requires 10% excise tax, and is fully
taxable (exceptions under IRC Sec. 72 for "turning on the faucet")
- Limited investment choices
- Cannot use as collateral for a personal or business loan, without
paying taxes and penalties
- Long term, they can create a tax problem that must be solved with
life insurance

You can use an overfunded life insurance policy to do all of the
above, with the ability to use as collateral and have access to cash
without penalty or tax prior to age 59.5, AND income tax free death
benefits. If you have a C Corporation, there are some potential tax
advantages that can be used, but a discussion of these nonqualified
plans is beyond the scope of this forum, except to list the three
basic plan types here:

1. Deferred Compensation
2. Executive Bonus
3. Split Dollar

You may be a candidate for a defined benefit plan, which allows for
greater contributions than a defined contribution plan (like a 401(k)
or SIMPLE IRA). If you fully insure the plan (guarantee all benefits),
then you can REALLY sock away some cash. Contributions are deductible,
assets grow tax deferred, just like an IRA, but the downside is you
have to contribute to each employee - you cannot discriminate.

Finally, you may want to become charitable - a CRT, or Charitable
Remainder Trust, can allow you to get a tax deduction, enjoy tax
deferred growth (if funded with an annuity), and control when you get
the money (turn on the cash faucet). These plans are also generaly
exempt from the claim of creditors, but you also limit your access.

All of these plans require the help of a professional. You can get one
now, and do well, or get one later to fix the problems you create by
trying to do these yourself. As a rule, we get paid more to fix
problems. The lowest toll is today. =)

- quote -

Due to the limits on the plan. Simple IRA is limited by
law to 8K (2003), 9K (2004), 10K (2005).

- quote -

Question: Does the SEP contribution have to come from
money earned at the company that setup the SEP. Can
I start a second company, start up a SEP, and contribute
money earned from the first company? I think not, but
I'll do some research on this. Do you know?


- quote -

Yeah -- I guess when you think about it that way. We've
been pretty lucky thus far. I hope it keeps up.

In article <3fa8fefe$0$60174$a0465688[at]nnrp.fuse.net> , Sgt. Sausage
<nobody[at]nowhere.com> wrote:

- quote -

Are you maxed out due to a limit in the plan, or is this
due to the maximum amount of profit that the business
earns? If it is a plan limit, the obvious thing to do is
to start a 2nd business. You could divide up your current
business in to geographic regions. Or perhaps the business
itself will suggest some type of division. Another option
is to have a 2nd business that owns the tools and equipment,
and that business earns income by leasing the stuff to the
active business. You could make this a Nevada corporation,
and avoid having to pay state taxes on the profit made by
this 2nd corporation. For this 2nd company, set up a SEP
plan (if you can, it has higher limits), a Simple, a
self-directed 401K, or a Keogh plan.

- quote -

You mean "lucky", not "bummer". That rule means that
you are in the top 2% of income earners in the richest
country on the planet.

-john-

--
================================================== ==================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ==================

Question: I own a business, and that business offers a
SIMPLE IRA for its employees. I participate in this
plan also.

I'm currently maxed out: 8K this year (goes up over
the next several years).

My wife is maxed out on her 401k at her employer.

Combined, my wife and I have enough income that
we are currently ineligible to contribute to a Roth IRA.
Bummer.

Does anybody have ideas on contributing more -- to
any plan -- for the long term that is tax deferred like
the IRA/401k.

I've got about an additional 30K a year that needs
invested. Currently investing in a regular investment
account -- by "regular" I mean not tax deferred.

I won't be needing this money for about 18 years, so
I'd like to get the benefits of the tax deferral if possible.

Any ideas?

Thanks.