Must withdrawl 2006 IRA. I'm Self Employed

[MonarchDon]

My CPA just finished my taxes and is telling me I must withdrawl my 2006 roth ira contribution because I have zero net income for 2006. And that I can't contribute any money to my SEP for 2006 either..Would I be better off claiming income so I can keep my contribution...I always put the maximum allowed into these accounts because it's my only form of retirement savings...

[Empty Pockets]

First, how did you end up with a zero income and still have cash available to set aside ? I'm not doubting you, I'm just wondering if you could depreciate some purchases over a length of time instead of cash expensing them.

I'm self employed too and I've always wanted to have a taxable income that at least soaks up the lower tax brackets. There's no free lunch, the tax man will get you now or later.

I'd rather have some taxable income so you can take advantage of a Roth, you can also set aside up to 25% in a SEP IRA. Your CPA should be able to give you some options.

[MonarchDon]

Originally Posted by Empty Pockets

First, how did you end up with a zero income and still have cash available to set aside ?

\

Ira contribution money came from savings

[Empty Pockets]

Looks like your CPA is right.

Not so much a Roth IRA comment, but a tax comment in general. I think you may want to have your business show some earned income rather than expensing things out, or retaining earnings til later. Sooner or later the tax man is waiting with his hand out and you don't want to let a year go by without soaking up at least the 10% bracket. This may result in you paying a little tax now, but it will likely be in a lower bracket now than if you hold off til later.

I've known some business owners who hate to pay any taxes so they'd go out of their way to pay expenses and build inventory only to get slaughtered in the highest bracket when they sell out.

I've also seen self employed people delay paying any income tax for years building up their business and when they retire, they barely even get a SS benefit.

Another good reason to have your business show a profit is that it is easier to borrow money for operating or capitol improvements, banks like to see you make some money.

Not to preach, but many businesses are valued based on their profitability. A business turning a profit is going to be easier to sell, and for a larger amount.

I know this is more than you asked for, but to answer your question "would I be better of claiming income" I'd have to say yes, for the Roth contribution and the other reasons here.

[FinanceDude]

Originally Posted by MonarchDon

My CPA just finished my taxes and is telling me I must withdrawl my 2006 roth ira contribution because I have zero net income for 2006. And that I can't contribute any money to my SEP for 2006 either..Would I be better off claiming income so I can keep my contribution...I always put the maximum allowed into these accounts because it's my only form of retirement savings...

Looks like the CPA is VERY GOOD at eliminating taxes..........

Business owners always have that "fate of choice".............do I show Uncle Sam I had a good year, and pay more taxes, or should I deduct like crazy and stiff Uncle Sam this year?"

I'm not a CPA, but a SEP IRA is a "tax deduction" of sorts you can take that HELPS YOU for retirement. Not sure if it's a "line item" deduction or lowers your tax table calculation, but it's worth a question to the CPA.

You can put away up to $42000 or so in a SEP IRA each year, but that would involve spreading out depreciation on big fixed assets or lowering your expenses that you claim for the business........

[MonarchDon]

I just spoke to my Accountant and he asked me a question that I didn't really have an answer for.

Why would anyone want to pay tax to fund an IRA? You are better off not paying tax and not funding an IRA. To actually pay tax and then fund an IRA and then pay tax on those earnings does not make sense.

[JohnDoe]

Originally Posted by MonarchDon

To actually pay tax and then fund an IRA and then pay tax on those earnings does not make sense.

Roth IRA's are not taxed - at the moment.

[FinanceDude]

Originally Posted by JohnDoe

Roth IRA's are not taxed - at the moment.