Will this work? ROTH IRA

[Guest SprinklerGuy]

Hello, been here before, but got busy and was working on several other things......back to the grindstone though!

I want to open ROTH IRA's for my wife and I. I am the owner of a corporation and my wife "could be" an employee but is currently not working. I make approx. 100k per year roughly. Perhaps a little less. I am 34 and wife is 35

Could we do this:

I pay my wife approximately 500 per month or 6k per year so that she would qualify for earned income.

We take her money (paycheck) and fund our IRA's. Is this possible/and or feasible? What do you think?

Thanks in advance.

BTW....John G....we have snow in Woodland Park this am! 1-2 inches on my deck!

[mbozek]

You can do better than the 3k roth IRA contribtuion by setting up a 401(k) plan and allowing your wife to contribute up to 100% of her salary tax free ( less ss contributions). She could put 6 k in the 401(k) plan on a tax free basis which would 0 out her taxable income (and reduce your business income subject to tax by the same amt) and you could put 3k into her roth IRA and 3k into your own. Or she could make 6 k in after tax contributions. I am assuming that you have the disposable income to make such contributions. If not you could defer such additional contributions to a future year. You could still pay her 6 k and use the cash to fund both of your Roth IRAs since the cash is fungible- IRS only requires that a taxpayer have compensation in order to set up an IRA- it does not trace the source of the funds used.

[Guest SprinklerGuy]

problem is if I set up a company-wide 401K....will I not have to match the employees deposits or something like that? or is that a SEP? I have 5 other employees and that could get ugly could it not?

[Guest AFRICA6796]

True, If you establish 401(k) plan all other eligible employees must be allowed to participate. Bear in mind however that you do get a tax break for those contributions as well.

Otherwise, you could pay your wife, have her fund her IRA, pay yourself and fund your IRA.

It would be nice though to set us a retirement plan so that those who work hard for your company have something to look forward to when they retire.

You could offset the plan expenses by reducing annual salary increases if you want to – or other perks.

[John G]

You may want to look into pension/profit sharing plans under which you have some latitude in defining participation. On the Roth, you wife qualifies if you have the earned income. Putting you wife on the payroll (no doubt she does some things of value for the corporation) is not needed and will have an impact on SSN, unemployment insurance, etc.

You should talk to you accountant or tax advisor about your options. Some small businesses find it desireable to adopt a prototype plan as a cost effective way of avoiding unique legal fees to set up a plan.

[mbozek]

There is one caveat about setting up a 401(k) plan if there are employees other than the owner and spouse: If the spouse and the owner make pre tax contributions which exceed 60% of the plan assets then the plan will be deemed top heavy and the sponsor will be required to contribute 3% of compensation on behalf of each eligible participant because the salary reduction contributions will be deemed employer contributions to a ps plan under IRS regs.