No. of Recommendations: 0
A person I know is retired and has no earned income but has plenty of income from social security, etc to live pretty much as he pleases. He wants to make contributions to an IRA, preferably Roth, and plans to file a schedule C for a fictitious business. He will claim $2000 as income, pay the $306 self employment tax and contribute $2000 to the IRA. Does the IRA check on things like this or is the amount so small that it is likely to escape unnoticed? If he continues to do this will the self employment tax eventually increase his social security payout? He's a little strange in other ways too in case you're wondering.

There are at least two problems here:

1. This stategy does not make good financial sense in that creating a business to manufacture $2000 of Schedule C net income will cost your friend approx. $860 ($2000 * 28% for federal tax plus the $300 or so in self-employment tax) per year.

2. The IRS is particularly focused on Schedule C filers (because it is a common area of abuse as well as simple error) & if audited, a "fictious" business would most likely be discovered. If audited & if discovered; all the relevant transactions would be reversed & revised computations for all tax years involved would be performed. Then depending on the results, interest & penalties would be assessed.

Print the post  

Announcements

The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement