LLC in AZ - Taxation - Retirement

[rrabc456]

I am planning to form an LLC in Arizona to start consulting in information technology field. I am going to be the sole member in it and I am in my late 30s. I expect to make around 120K per year in 2007.

At the same time, I would like to save the maximum I can for my retirement. I understand that the total contribution that can be made to an individual 401K(in the form of pre-tax contribution, profit sharing etc.) for 2007 is the lesser of 100% of compensation or 45K. My idea is to use a combination of $15,500 (in 2007) as an invidual contribution + (45K - %15.5K) for profit sharing. However this implies employer-employee relationship.

To be able to do this, how do I need to elect my LLC for taxation purpose? Can I do this with sole proprietaryship (the socalled "disregarded entities")? do I need to use partnership tax election or C or S corp tax election? Other than tax election, how would I actually go about executing this plan? Do I need to hire some body to help create individual 401K plan?

Is forming an LLC the right choice to contribute maximum amount to my retirement? I am assuming that total contribution to individual 401K is tax-deductible. If this is not the right assumption, please let me know.

I would appreciate your guidance on this.

[Chris]

Ask an accountant, it is worth their advice. I think an S-Corp would provide the most savings though.

Personally, if I were you, I wouldn't put all my eggs in one basket. You're putting all possible savings into a 401k. Consider some other potentially more lucrative investments like real estate.

[dhandaulat33]

Hi, I am a proud capitalist. Considering that capitalism inherently distributes wealth disproportionately among the citizens of a particular society, does a capital gains tax that is much lower than the income tax further contribute to disproportionately of wealth accumulation? I believe in a flat taxation of income. Why shouldn't capital gains be taxed at the same rate as an individual's income? After all, income is income....right? Can anyone make the argument that a capital gains tax that is the same as the income tax would discourage investment?

[Chris]

Yes, millions of people can make that argument.

You only qualify for capital gains tax when you invest your money and hold it within that investment for a period of atleast 1 year.

Removing it or raising it would cause nearly everyone out there with an investment in anything that is more than 1 year old to cash out before the deadline, which would put our economy into a recession if not a depression.

Think about it. You have an investment, if you sell it on Dec 31st say 2010 you pay 15% on the gains, if you sell it on January 1st 2011 you pay 35% on the gains. You're going to sell it on December 31st (or earlier in anticipation). Stock market crashes, real estate market crashes, businesses cannot get needed capital and go under, unemployment skyrockets. etc.

[demosfen]

401k will be worthless in inflationary scenario - you should only have $$ in 401k if you believe dollar will not collapse any further