Single Member LLC Start Up

[Guest nwr1972]

My wife is starting a small business under an LLC structure. It is a single member LLC (she owns 100%). We do not expect the company to make alot of money in the first couple years but what it does make I would like to put away in a 401K like structure.

My income is sufficient for our living expenses and I already maximize my 401K (corporate employer) and Roth contributions. Does this prevent us from having a 401K like vehicle for my wife (or simple IRA for that matter)? How can I use the LLC business to optimize our combined tax deffered savings (can the LLC match her contributions).

Also please confirm that a married couple filing jointly can only invest $4K a year in a Roth (assuming income limitations are met)

Any advice would be appreciated, nothings more painful that the gov't taxing your retirement savings growth.

Many thanks

Neil

[J Simmons]

Neil,

A single member LLC can have a 401k plan and your wife, the sole owner, can benefit under it regardless of the fact that you accrue benefits under the corporate 401k where you work. The issue is the amount that she can do. An LLC (unlike a corporation) renders your wife to be self-employed in that business. The question is whether the limits on individual contributions kicks in because as the only owner she alone would make the decision as to any company (LLC) contributions to the plan. Some in the IRS have expressed their view that there is no substantive difference, so the total benefits she should get under that plan would be the individual limit amount: $15,500 for 2006 (or $20,500, if age 50 or older by year's end). This view cuts contrary to legislative efforts dating back to the 1980s when Congress tried to put plans for the self-employed (Keoghs) on equal footing with corporate plans. That notion would suggest that in addition to those individual limit amounts, your wife could cause the LLC to contribute up to an additional $29,000 to the 401k plan for herself, as a 'profit sharing contribution'.

It gets a bit tricky because her self-employed earnings, after all other business expenses have been paid but before the LLC contribution, would need to be adjusted downward by 1/2 of the self-employment taxes. This is one of those efforts to put the self-employed on par with the corporate employee.

Then, the amount of the LLC contribution cannot be more than 25% of what would remain of self-employment earnings (reduced by 1/2 of the self-employment taxes) for her after the LLC contribution is made.

As for then a Roth IRA contribution, if your wife accrues benefits for a year under her LLC's 401k plan, the lower income threshold that you face for being able to make Roth IRA contributions would apply to your wife as well--rather than the higher, "spouse" threshold if she didn't accrue those benefits.

The Roth IRA amount is $4,000 per individual eligible to make it, and not in the phase-out bracket of income.

[Bird]

Neil-

Depending on what you mean by "We do not expect the company to make alot of money in the first couple years..." you might want to consider a SIMPLE IRA instead of a 401(k). Your wife can defer up to $10,500 if under age 50 ($13,000 if over) as an employee contribution, and the company would match 3%. The 401(k) limits are higher but then you need to maintain a plan document and eventually do annual reporting.

[John Feldt ERPA CPC QPA]

correction of limitation amounts on J Simmons message:

"the individual limit amount: $15,500 for 2006 (or $20,500, if age 50 or older by year's end)"

should be

the individual limit amount: $15,500 for 2007 (or $20,500, if age 50 or older by year's end).

[J Simmons]

I stand corrected (thank you, J4FKBC)