I've been doing a lot of research on the Individual 401k recently so I
think I can address your questions. Mark Boyle is correct. Let me add
to Mark's post. Anyone interested in an Individual 401k should read
the information at http://www.individual401k.com

With an LLC , if the owner elects to be taxed as a sole proprietor than
you have until your personal tax filing deadline plus extension (so up
to Oct 15th if you file an extension) assuming the plan was established
by 12/31 to contribute to the Individual 401k.

This includes the salary deferral and profit sharing contribution.

Mark B is correct that the correct way to go about CYA is to have the
signed paper on file saying that you are going to contribute salary
deferrals into the plan (by the way the max is 15k not 14k in 2006),
but the actual contributions don't have to be made by 12/31 for someone
being taxed as a sole prop....although you might as well get the salary
deferral $$ working for you.

The profit sharing portion can be added to the individual 401k when you
complete your taxes and know your net income. That way you don't make
an excessive contribution. Here is some information explaining the
contribution further.

http://www.individual401k.com/indivi...k/benefits.htm

In 2006, the total contribution limit for an Individual 401k plan is
$44,000 ($49,000 if age 50 or older). The annual contribution into an
Individual 401k is made up of 2 parts: a tax deductible salary deferral
contribution and a tax deductible profit sharing contribution. The
maximum allowable contribution calculation simply takes the profit
sharing contribution and adds the maximum salary deferral contribution
amount to it and that's the total allowable contribution.

In 2006, 100% of compensation up to a maximum of $15,000 ($20,000 if
age 50 or older) can be contributed in salary deferral. In addition a
profit sharing contribution can be made up to 25% of compensation. For
incorporated businesses the 25% profit sharing contribution is based on
W-2 income. For sole proprietors the 25% profit sharing contribution is
based on adjusted earned income. Adjusted earned income is determined
by completing an IRS worksheet and is calculated by taking gross self
employment income and subtracting business expenses and 1/2 of the self
employment tax (FICA and Medicare).

To determine the annual retirement contribution you could make based on
your specific income use the retirement contribution calculator.

Here is the link to run the calculator to determine the $$ amount that
you could contribute. Run the calculator as a sole proprietor since you
are taxed like one.
http://www.individual401k.com/retire...f-employed.htm

Dave S wrote:

- quote -

My understanding is as follows, you may also want to take this over to
misc.taxes.moderated for more input on the tax aspects.

The Individual 401K uses "elective salary deferrals" and "employer
profit sharing contributions" just as regular 401k's do, but as a sole
proprietor, one person wears both hats, therefore the terms are mere
technicalities, but you must follow the form. In particular, this means
that maximum salary deferrals count as part of your total allowed
contribution, whether you actually contribute the maximum allowed amount
of salary deferral or not. (I'm not completely sure about this and
welcome corrections with references.)

So, for example, I think you (read: your wife) could do this:

After opening the plan with a custodian, you could file a signed piece
of paper with your other business documents stating that you wanted an
elective salary deferral for 2006 of $7,000/month beginning November
2006. Then make two deposits, one in November and one in December, of
$7,000 each and designate them as "salary deferrals" on the blank form
that the custodian provides for this purpose.

Had you started this process earlier in the year, you could have made,
say, salary deferrals of $1,400/month for ten months instead of
$7,000/month for two months.

Then, after the end of the year, when you know your net profit, use the
worksheet provided to determine your total allowed contribution, which
will take into account your elective salary deferrals. Then deposit
that extra amount and designate it as "profit sharing" on the form provided.

If you don't make the full amount of salary deferrals on a periodic
schedule before the end of the year, the difference knocks down the
total amount of your allowed contribution from profit sharing. If you
make an excess contribution because you don't really know what your net
profit will be ahead of time, then of course you have to handle it like
any other excess contribution to an employer retirement plan.

-Mark Bole

Mark,

Thanks for the reply.

Another question: With a sole member LLC, I don't really understand the
concept of 'salary' or 'profit-sharing'. Would she be able to complete
her taxes by mid-April and then put net profits into her 2006
individual 401K (up to the maximum allowed)? (This assumes she had
created the plan in 2006.)

Dave S


Mark Bole wrote:
- quote -


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

"Mark Bole" <makbo[at]pacbell.net> wrote in message
news4q3h.5376$B31.3280[at]newssvr27.news.prodigy.net...
- quote -

While this is the default, and the way most people treat their LLCs, this is
not the only possible tax treatment. LLCs can be taxed as corporations.
(Included for completeness; not because the OP is treating the LLC this
way.)

You may be thinking of IRS Pub 3402, that says "*Generally*, when an LLC has
only one member, the fact that it is an LLC is ignored or 'disregarded' for
the purpose of filing a federal tax return." Emphasis added.
http://www.irs.gov/pub/irs-pdf/p3402.pdf

But see also IRS FAQ - Keyword: Limited Liability Company (LLC),
http://www.irs.gov/faqs/faq-kw105.html "If the LLC has only one owner, it
will automatically be treated as if it were a sole proprietorship (referred
to as an entity to be disregarded as separated from its owner) unless an
election is made to be treated as a corporation. ... The election referred
to is made using the Form 8832."

- quote -

A plus for Price is that they offer Roth 401(k)s (think Roth IRA in 401(k)
form - post-tax employee contributions, growing tax free).

- quote -

Thanks to Rich Carreiro for pointing out that the law was recently changed
to increase this to $250,000.

Mark Freeland
BnetOnewsX[at]sbcglobal.net

Dave S wrote:

- quote -

A single-member LLC is disregarded for tax purposes, so she is, as you
said, a sole proprietor.

- quote -

One of the upper limits for her will be the net profit from the
business, with appropriate adjustments for 1/2 self-employment tax and
some other percentage calculations. Your income has no bearing on this
whatsoever.

The funds themselves can come from anywhere, if that is what you are
asking -- they don't have to come out of her business bank account
(although for record-keeping purposes, that might be a good place).

To make this work, you have to establish a written plan before the end
of the year. You can then make elective salary deferrals, also before
the end of the year (hurry, you don't have much time left). You can
also make employer profit-sharing contributions up to the due date of
the tax return (she is considered both employer and employee in this case).

IRS Pub 560 (www.irs.gov) has more details and a worksheet to use in
Chapter 5. I recommend going to the web site of Fidelity or T. Rowe
Price (or your favorite financial institution) and download the kit they
provide, which will also have the various worksheets and forms you need
to get started, and which are a little more user-friendly than the IRS
publication.

As long as the plan assets remain under $100,000 you won't have to meet
any further filing requirements. When the plan gets larger, or if she
hires employees, or if she terminates the business, then there are some
final filing requirements to be met.

-Mark Bole

My wife has a sole proprietorship LLC in Georgia with no employees. I
believe she can set up an individual (one-person) 401K. My question is
where can the funds come from for this account? For most things, the
LLC funds are not independent of the total income of both of us. Would
her contributions be limited to the income or profits (gross or net?)
from her enterprise or can we use my income to fund her 401K
contributions.

Thanks.

Dave S