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Simple and 401K in the same year.


Guest Archimedes
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Guest Archimedes

My wife is self-employed. We, have been using the SEP, but if she Nets less than 50K in a year it works out better for her to use a simple since we can contribute the 10,000 limit right away. So we have several questions.

First,

can a self-employed person / sole proprietor pay themselves as an employee, create a Jan 1'st "Bonus" check such that after SS&MC taxes the remaining $10,000 could be contributed to a simple plan? Of course her employer self would also have to do a 3% match on top of that. for a total of 10,300 to the simple account. And a payroll check of roughly: (10,000/(1.00-0.0765)= 10,828.37(what I'm not taking into account is that the money not sent in to the Simple i.e. 10,828.37-10,000 the SS&MC taxes themselves would be subject to federal witholding. so the "bonus" check would need to be about $11,000 or so.)

Second,

Can she hire me as employee and do the same as above?

Third,

Since, I have a 401K at work, am I limited to 15,500 for the year in Total Contributions to all my IRAs?

Finally,

If she paid out these "Bonus" checks to both of us on Jan 1st, equaling about 23,000 in expenses to her business, putting her company in the red for the beginning few months of the year. Would it be a problem if she ended the year at a loss, when in fact she paid herself? (although it comes off our joint tax return because we both made the maximum contributions we could to our separate IRA's). Also, if her businesss needs to "make" the money it pays to her and I, could I pay her business for some bogus service with our personal money to make up for the shortfall, at least on paper?

I know this is very convoluted, I am just a nut about finding ways of using things like this to our advantage. The net effect is we can put up to 2*$10,300=20,600 into a SIMPLE IRA for each of us, at the beginning of the year, just by her having her own business, all completely tax deductable(for the moment). And in a few years, we could convert each account to ROTHs So.... I'm basically increasing the amount I can contribute to ROTHs because we have passed the AGI limits to use the standard ROTH account, but even if we hadn't this would still be a lot more than the 4,000 currently allowed for each year!

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A few points ...

A self-employed person can't treat any payment to herself as a business expense. Her earnings/salary is just whats left over from business revenue after subtracting business expenses.

The elective SIMPLE contribution for the self-employed person is limited to net self-employment income as shown on Schedule SE. If there is a loss for the year, then no contribution. (All contributions on behalf of the self-employed person are adjustments on Form 1040, not business expenses.)

She can employ you, but your total elective contributions to 401k and SIMPLE are limited to $15,500 in 2007. If you max out your 401k, you can't put anything in SIMPLE. Also if employed, you and she (as your employer) would have to pay all the payroll taxes.

Since you both participate in employer plans (SEP and SIMPLE are), the deductibility of your traditional IRA contributions is limited or eliminated if your joint AGI exceeds $83,000 in 2007.

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