This is getting a little complicated, so someone please throw in
corrections as needed. Here's my take on the situation:

1. "The Death and Taxes Rule" - If setup correctly, you should be able
to avoid all PEROSONAL income taxes related to this money. HOWEVER, the
LLC will have to pay payroll taxes on money it distributes as income to
employees. $10K in profits will not translate to $10k in wages for you
and your wife. After company taxes are paid, there may only be $8750
(hypothetical example) left. In this example, You would pay your wife
$7000 and then have the corporation contribute $1750 (25% of her
compensation) on her behalf. However, company payroll taxes are
obviously going to be less costly than paying both payroll taxes on the
10K AND income taxes on the amount you actually take home.
"Lunch may be cheaper, but its never gonna be free!"

2. The yahoo article is correct although worded someone confusingly.
The article assumes both of you take as employment income and do not
contribute it to an i401(k). In that case you would include the extra
income on your personal takes as earned income, and you would be taxed
on it. However, since you are contributing the income to a qualified
retirement account it is not taxable and it is not included in earned
income on your 1040.

3. Any payroll/accounting software like quickbooks can setup your
payroll process to handle qualified deductions. Your wife should get a
check for "x" and then have a qualified deduction for "x" leaving $0.00
to be taxed/withheld.

4. If you plan to give company profits to your wife so that they can be
diverted into a qualified accout (and thus avoid taxation) you probably
do have to accomplish this before 01/01/2007. However, I am not
positive. You should consult a CFP and/or CPA. The plan may simply have
to coincide with your LLCs fiscal year end.

5. Lastly, I am also unsure as to how to setup the actual paying of
your wife. W-2 reporting and all that good stuff are going to be
required, but Quickbooks can handle that too. i401(k) plans allow for
both payroll deductions and lump sum contributions. Obviously the lump
sum would allow you to reactively figure out just how much profit the
company will make and only give her the exact amount in earnings.
Payroll deduction would require estimating proactively.

Considering the year-after-year implications, I would not go at this
alone. A CFP/CPA may charge a couple of thousand or so to setup the LLC
and i401(k), but you'll pay alot more than that if things are setup
incorrectly and the IRS audits you.

Hope this helps.

kastnna,

Thanks for the info about the phaseouts based on my AGI. I appreciated
the words concerning future tax brackets and how future laws can affect
it. I currently have no employees. I've been thinking about forming a
LLC and making my wife a member (or co-owner) as you suggested and have
her place her income into an i401(k). However, on a yahoo article
states: "Once your spouse is a member, you will both report LLC income
on your personal tax return. Both of you will pay quarterly estimated
income taxes and self-employment taxes." So if I make 10K after
expenses and give her a salary of 10K, then we will both get taxed
(Fed, state, and SE tax?) on the original 10K that I made? Do I have
to open the i401(k) before 12/31/06? Finally, if I pay my wife income,
do I need to take out SS and Medicare taxes from her salary and give
her an official paycheck or can I just write her checks from a LLC
checking account. Thanks for your advice.

P.S.

You mentioned putting away $2K in your OP. If you are interested in
putting away as much as possible and you have no other Small Bus.
employees, setup an i401(k). Make your spouse an officer of the company
and increase her earnings until you have no profits left. Then she can
contribute all the increased earnings to the i401(k) so that you do not
pay taxes on it. The company will have to pay SE taxes on the earnings
however

She can contribute 100% of earnings up to $15K. Employer matching is
limited to 25% of compensation or 44K total.

First, you should draw a picture of how you see yourself financially in
your retirement years. If you think you will be in a higher tax bracket
at retirement, concentrate on the Roth, otherwise stick with
traditional pre-tax vehicles. Also remember that income isn't the only
determinant of future tax bracket. Someone mentioned this earlier, but
it seems to have not been given its due attention. It does no good to
defer taxes to a later point in time, just to end up in a higher tax
bracket because all of your deductions have disappeared OR the
government has made substantial tax law changes in that time.

Contributions to an employer sponsored qualified plan are cumulative.
You have already maxed the annual contributions that can be dumped into
ANY type of qualified plan. If you predict a lower future tax bracket,
continue the max 401(k) contribs. If you believe the inverse, start
putting money into a roth 401(k) IF your employer offers it. You might
want to spread out your risk and use a combination of the two.
Regardless of you decision, the MAX is $15K, not $15K into each.

Your 10K of small business income isn't going to be very useful to you
in terms of retirement. Because your AGI is above 160K and you have an
employer sponsored plan, none of your contributions to an IRA will be
deductible. This will also be the case for your wife, even if she is
unemployed. Details on this can be found in IRS publication 590 under
"phaseouts".

If you establish a SEP-IRA, you (the employer) can make contributions
to your (the employees) retirement plan. Since you are self-employed
the amount is based on net profit and SE taxes must first be
calculated. There are a number of online calculators that can give you
an idea. If this is a viable option you should also consider bringing
your wife into the company so that contributions can be made to her as
well. However, discrimination practices are very specific. If you have
other eligible full-time employees they will have to receive
contributions also.

Obviously, if you end up taking the small business profits as w-2
income there are dozens of non-qualified investment vehicles to choose
from (ETF, MF, equities, annuities, etc, etc...)

Please feel free to beat me over the head on any factors I may have
neglected or overlooked. Hope I helped.

- quote -

2006 was the first valid year for this account.
The law was set to expire into 2010 until it was made permanent three
months ago.
So I'm guessing the big boys were sitting on the sidelines until the
dust settled.

kastnna wrote:
- quote -

Yes, I'm dropping 15k since I'm only 34.

A solo roth 401(k) seems interesting but why do none of the major
brokerages offer it? I amy just open the SEP IRA this year for pre-tax
deduction and open a solo roth 401(k) next year. Does this make sense?

yup, it's you.

OP = "original poster"

if you google for something on the order of "newsgroup acronyms" you'll find
sites, like this one:
http://www.merlyn.demon.co.uk/acronyms.htm
that list commonly, and uncommonly, used abbreviations.

albert

<outrider157[at]yahoo.com> wrote in message
news:1164812085.207744.216970[at]l39g2000cwd.googlegroups.com...
- quote -

- quote -

Thanks for the advice. Your assumptions are correct. So in the long
run, would the SEP converted into the Roth but taxed be better than the
solo 401(k) no tax but no Roth conversion. Or vice-versa? Would the
gain the SEP be taxed if converted to a Roth? Since I'm a newbie, I
assume that the OP is me, but what does OP stand for anyway?

Mark,

Please clarify "maxing out" your employer plan. Are you limited by
being a highly compensated employee? How old are you?

I assume you mean that you are contributing either 15k or 20k based on
your age.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote in message
news:456CEBC9.5070709[at]paragondynamics.com...
- quote -

As I understand the OP and the tax rules (either of which could be wrong
:-), the OP has maxed out employee contributions this year, and only
employee (not employer) contributions can go into a 401(k) post-tax. So for
this year, the OP could only add to the 401(k) as an employer (having maxed
out as employee). These contributions would be post-tax, same as in a SEP.

On the plus side, the pre-tax employee contributions to a 401(k) (Roth or
traditional, doesn't matter) would not have to be converted to a Roth IRA
(pro-rata) when the OP converted his non-deductible IRA.

To be concrete, if the OP puts $2K into a SEP (pre-tax), and $4K into a
non-deductible IRA, then when the Roth conversion is done, $2K out of $6K
converted is taxable (assuming no gains). But if the OP puts the $2K into a
401(k), it is not eligible for Roth conversion, and no tax is due. (Of
course, only $4K gets converted this way.)

I'm not entirely sure about the rules on SEPs being treated the same as
other IRAs (especially regarding conversions, though I know they can be
converted to Roths), so please correct as needed.

Mark Freeland
BnetOnewsX[at]sbcglobal.net

wyu[at]talisys.com wrote:

- quote -

Note that Solo Roth 401(k)s are available and would provide a post-tax,
tax-advantaged option.

-Will

First answering the questions in a general sense. If you think are
taxed now more than you will be taxed in retirement, 401K/IRA gives you
a higher benefit than a Roth IRA. On the otherhand, they say don't put
all your investments in one basket. Well take the same approach to tax
shelters. Who knows what the future tax laws will look like? Perhaps it
is a good idea to put some money in tax now and some in tax later and
some in low-turnover tax every year.

In your specific case, your AGI is too high to qualify for a Roth IRA.
$150K is the threshold for reduced contributions, $160K = zero. So the
SEP IRA is your only option. SEP IRAs are grouped with traditional IRAs
for many purposes including conversion to Roth IRA. The only limitation
is your high AGI so you have to wait for 2010 for the Roth conversion
AGI limit to disappear (unless the tax laws change again).


outrider157[at]yahoo.com wrote:
- quote -

You may also consider other tax-deferral savings/investments besides
IRA
income-deferral instruments. IRAs where designed to phase out at about
90% income percential. Higher income people have to use these to
maintain
advised savings rates of 15% or more of income.
Alternatives include income-deferral in insurance products called
annuities.
Theres a lot BS ones out there, but some of the bare-bones VAs from big
brokerage houses may be worth it.
You can also defer taxes by holding stocks, real estate, or
collectables
for decades. A stock index fund has the saftey of diversification with
lower tax throw-offs of managed stock funds.

Notice I use the two terms "income-deferral" and "gains-deferral".
Currently these are taxed at different rates with the latter being
better.
The history of the tax over the past several decades suggests
tax policies change dramatically over time. So a second advantage of
divesifying savings/investments is not put all your eggs in the
same tax-basket, whatever it may be 20 or 50 years from now
when you use your savings.

I need help deciding which IRA is the best for me.

I'm married with a single income of > 190K AGI. I max out my employer
retirement plan. I also have small business income of about 10K this
year.

Is it better for me to open a SEP IRA and contribute 20% ($2K)of my
small business income into it?

Or should I open a traditional IRA and contribute the max of $8k ($4k
each for my wife and I) with the strategy of rolling this money into a
ROTH IRA in 2010 due to the new law changes.

Is it possible to rollover a SEP IRA contributions into a ROTH IRA in
2010?

Thanks.