In article <tjd8m0lnojjh5g96fgeotbk9620ifgntkd[at]4ax.com> , News Subsystem
<news[at]news.astraweb.com> wrote:

- quote -

I think you are going to be getting a visit from the IRS. I am
not tax expert, but I have been around the block a few times. I
believe that you are required to pay yourself a resonable salary
given your income. The 44K is going to end up being treated as
salary, and you will end up paying the additional taxes on it.

I would suggest getting a 2nd opinion on this before the IRS comes
knocking on your door with all kinds of penalties and fines. At
the very least, you are likely going to have to prove that the
typical person doing this work in your area only earns $12K per
year, which I would find to be unlikely.

Putting this another way, if what you were doing was legal, everyone
in the US would be doing it as a tax dodge.

- quote -

I would first fund a Roth IRA to the max. Then, I would fund a
SEP-IRA to the maximum that you are allowed to. The SEP allows
you to put away a percentage of your profit, and the limit is
much higher than want a traditional 401K allows. This is one of
the best tax benefits out there. Since you are young, putting away
a huge amount each year for a few years will leave you set for
life given how many years you have for the market to work its wonder.

-john-

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John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
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"News Subsystem" <news[at]news.astraweb.com> wrote in message
news:tjd8m0lnojjh5g96fgeotbk9620ifgntkd[at]4ax.com...
- quote -

First - contributions to ALL retirement plans are premised on your earned
income (this means income you pay OASDI & MEDICARE taxes on - in your case
the $12,000 salary you took from your S Corp). For unsponsored IRAs (ALL
unsponsored IRAs) you can contribute the LESSER of $3,000 or your earned
income - in your case you could contribute UP TO $3,000 per year to an IRA.
For the purpose of calculating HOW MUCH you can contribute, it doesn't
matter whether you fund a traditional, nondeductible or Roth. There is
however a very big difference in whether you get a tax deduction, how you
get a tax deduction and where you might be at retirement depending on which
one of these you choose.

An unsponsored IRA is one which a taxpayer can set up on their own without
regard to their employer. A sponsored IRA would be a SEP-IRA. This plan is
sponsored by your employer and the participation and contribution rules are
different.

For a SEP-IRA you can contribute up to 25% of your salary - in your case
that would be $3,000, the same as a private unsponsored IRA).

Either the SEP or the IRA will be deductible. The IRA gets deducted on your
personal return. The SEP gets deducted on your business return because it
is included as part of the gross salary you received. Either way, you get a
deduction.

If you want to make a tax deductible contribution of $15,000 per year in a
retirement plan you will need to make some serious modifications to your
current situation. You will need to increase your salary to approximately
$60,000 per year, which will also increase your payroll taxes.

If you can live with making a "nondeductible" contribution that will grow
tax deferred (much like a traditional nondeductible IRA - but without the
limits) you can do so via a Variable Annuity. A VA will let you put aside
pretty much as you want to (the companies I'm familiar with do have a
limit - you can't put in more than $1,000,000) and it all grows tax deferred
until you start drawing it out. If you draw prior to age 59.5 you will pay
tax plus a penalty, but you will do that with the SEP or the IRA as well.

I would suggest you meet with an Independent Financial Advisor in your area
to discuss the options you have. For most people in your situation the best
option is a combination of those available. For example, depending on your
facts and circumstances, you could possibly fund a SIMPLE IRA up to $8,000
per year, PLUS possibly funding a personal IRA for $3,000 (These two could
be fully deductible for a total of $11,000), THEN putting an additional
$4,000 into an After-Tax, Tax-deferred Variable Annuity.

Good luck,
Gene E. Utterback, EA

Hi i was out of school and started working for a year now. i'm a self
employed health care provider working in houston texas. i have set up
a professional associates(s-corp entity) for my business for legal
protection and tax deduction benefit purpose. last year i grossed 80k,
paid myself 12k as an employee, with 24k tax deductable expeneses. i
just pay my self the rest of net income in a form of distribution
(about 44k). this was advised by my cpa. i didn't pay myself higher
salary because then i have to pay SS and medicare tax on it. i only
need to pay income tax on that 44k. now i'm thinking about setting up
a IRA account with vanguard. which type of ira would be more
beneficial for my situation? traditional ira, roth ira, or sep-ira? i
want to put in maximum amount allowable into the account. i was
thinking about traditional or sep since i can deduct it from gross
income, or if i should go with roth and put in my after tax income. i
think i can contribute up to 15k a year toward IRA since i don't live
lavishly and i'm single..... thanks for any advise. they didn't teach
us any business skill in professional school.....

newbie in investing