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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: Contribution Options no earned income Date: 7/11/2007 4:02 PM
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I still think we're off the mark here as I don't receive a W-2. I'm not technically employed by the company. I am an officer of the s-corp and therefore receive a k-1 each year showing profits distributed to myself (and two others as a shareholder. So while it's profit, it's not technically "earned income."

Correct. Folks who haven't worked with S Corps and their owners might not be aware of the distinction here. But your analysis is spot on.

I also receive rental income which isn't "earned income" either. Seems like SEP, Roth and traditional IRA's require earned income to qualify.

Again correct.

One potential solution, though. Is it possible for the S Corp to pay you a small salary? $8000 would be adequate to get you and your spouse an IRA contribution. (Or up to $10k if one or both of you are over 50.)

That will depend on how your S corp is working and what your agreements are with your business partners. As an aside, you might point out that officers of a corporation are, by definition, employees. The IRS would very much like to see all officers receive some kind of salary. When the S corp doesn't pay any salary at all to its officers, the IRS can argue that some (or all) of your distributions are instead salary. Then they tack on payroll taxes and withholding and charge you a boatload of penalties and interest.

If you're not really involved in the business, this may not actually be an issue. But it might be something to think about.

--peter
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