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Old 12-12-2009, 01:55 PM
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How much salary/SEP-IRA can I take out?

Dear Group,

I have two C Corps I setup for some service related businesses. I am the sole owner, shareholder, and employee.

Each one had about 50K in income in 2009, with no expenses of any kind to date (in other words, I've paid myself no salary, no retirement contributions, etc). I want to take most of the money out now (to avoid the double Federal taxation issue).

How should I proportion out the 50K in each C Corp to minimize overall taxes? Salary to me, dividends to me, and a SEP-IRA contribution to me? If so, in what percentages? For example, can I give myself a salary of 10K, a dividend of 10K, and make a SEP-IRA contribution of 20K from each C Corp? Should I even do a dividend, given the non-deductibility to the C Corp but the savings of payroll taxes to me personally on the money?

Thanks.


Bob



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Old 12-13-2009, 01:46 PM
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Clearly, you have specified that your intention is to minimise the C corporation double taxation. That is, you do not wish to have any residual income or profit in the C corporation, at least that is the result you are seeking.

Perhaps, the easiest way to do that is not to take dividends as these are not tax deductible, but to take a salary out of the C corporation to zero out the profits. Don't forget that your C Corporation is subject to the 7.65% share of the employer payroll tax. Thus, you need to take a salary in the following amount as follows from both the Corporation to Zero out the $50,000 profit;

Gross Salary to be taken........$46,447
Payroll Taxes-Employer Share....3,553.
Total Payroll....................... $50,000

Thus, if you take a payroll in the amount of $46,447 your projected payroll taxes at 7.65%, would result in the absolute payroll expenses of $50,000 and that would presumably zero out your taxable income from the C Corporations.

Now, when you file your personal tax return, if you meet certain income requirements you would be able to contribute $5,000 to an IRA and shelter that amount from federal income taxes. This is the simplest approach possible. But, you could maximise tax savings by opening a 401k plan in that you would be able to contribute a considerable amount more than the $5,000 in an IRA.

I would strongly suggest that you consult a pension consultant to determine whether or not you should go with a 401K plan as there are certain requirements and rules that you have to adhere to strictly especially if you have employees. However, if you have no employees, consider opening a UNI-K plan.

The Uni-K Plan is something completely different, it is a 401(k) plan designed specifically for owner-only businesses. This plan is offerred by Pioneer Investments and thanks to changes in the tax laws, even the smallest business can enjoy all the benefits of a big company 401(k) without the expense and complexity.

The UNI-K plan would enable you to potentially contribute up to 25% of your W-2 income towards a retirment savings plan or $12,500 per year!

Thus, in this scenario, you would take a reduced salary, save on payroll taxes on the amount of the contribution made to the 401k Plan as well, and of course save on federal income taxes on the $12,500 as well!! This is best approach assuming you are willing to set up this plan and work with your financial planner or pension consultant!

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Old 12-13-2009, 07:28 PM
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Individual 401(k)

Thanks for your good advice.

I did a quick perusal, and see lots of places offering individual 410K plans (Vanguard, Fidelity, Pioneer, etc.) A quick glance at the application to open accounts at the above places looked straightforward -- fill in the plan name, etc.

But do I need to set up such a plan as an entity unto itself (i.e., fill out papers and file them somewhere, like I did with my C Corp)? Or does merely opening a 401K Individual bank account constitute the formation of the Plan...with no other paperwork needed?



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Old 12-14-2009, 12:37 AM
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You need to set up the plan as an entity and I strongly suggest that you contact a financial advisor or a pension consultant to help you so that you meet all the statutory requirements.

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