Tax Question: Effect of Putting 401k in a C Corporation (Benetrends)?

[On the Road]

Normally, your 401k can only be invested in certain kinds of securities. Apparently, there is a financial firm which has figured out a way to use that money for other investments such as small business, real estate, or virtually anything else you can think of.

The way it's done is that you set up a C corporation (basically a shell), and the corporation sets up a retirement plan. Your 401k money is put in the retirement plan and invested in the corporation. Here's the website:

http://www.benetrends.com/RainmakerPlan/RainmakerPlan.html

I'm very interested in doing this, but am trying to figure out the tax effects. I assume that the money would be subject to corporate tax at the time it was earned, meaning that I would have to earn at least that much more just to break even.

Anyone have another opinion, or know where I could go to get an opinion on this?

[Inland]

1. I don't get the point.

A 401(k) is a deduction from wages, and a corporation can match.

If the corporation is a shell, then you have to put money in order to pay yourself wages from which to deduct.

So compare two situations: one where you can put money into investments now, and the other where you can put money into a C corporation and pay yourself wages where 85% is taxed as ordinary income and the rest is tax free.

Seems to me you just paid more taxes.

[On the Road]

2. Yes, the Money *Is* Taxed Twice

the advantage is how it can be used.

If you keep the same investments, you're taxed twice and you come out poorer.

But you're not allowed to use your 401k for many investments. You can't buy a Wendy's franchise, a rental house, or invest in a startup business. But if it sets you up in business and the return is high enough, it's worth paying the extra tax.

I've spent a lot of time over the last ten years doing fundamental and technical stock analysis, and the results are indifferent.

OOH, my girlfriend's brother is in China and needs capital to start another business. I would also like to buy a small apartment building, which has a much better chance of long-term success than stocks. It's not the right time now, but if the real estate bubble pops, I want to have my guns loaded. Just need to understand the consequences of financing this stuff with retirement dollars.

[Inland]

3. Why couldn't you just invest anyway you want in the first place?

You aren't talking about taking PRESENT RETIREMENT FUNDS and investing it in China, are you?

Your talking about setting up a shell c corp and putting non-retirement funds money into it and creating additional retirenments funds.

Why wouldn't you just take the non-retirement funds money and invest it, save the trouble and the taxes?

[On the Road]

4. I Don't Have the Funds Available in Non-Retirement Form

At this point, I would prefer to invest in things outside the stock market. I realize that's playing with retirement dollars, so I would only invest in things with a high probability of success.

[sendero]

5. I dunno...

.... I'm skeptical of these kinds of setups because the IRS can come back at any time and say they are improper and cause all kinds of grief.

Not only that, but being incorporated myself I'm familiar with the paperwork, filings and nonsense that must be attended to to maintain the corporation.

I'm also skeptical of companies who claim all kinds of non-existent benefits to incorporation. For example, a company that advertises on the radio that the "Nevada corporation setup" they can put you in (for a nominal fee) will shield your assets. Only in very limited circumstances says my accountant, a single person who is incorporated is just as vulnerable as anyone, they won't sue the corporation they will sue you personally.

Color me skeptical :)

[On the Road]

6. Thanks for Mentioning the Paperwork

hadn't thought about that aspect of it. That would be a pain. Does that quarterly financial filings, etc?

The IRS apparently endorses the plan. The Benetrends site has a scanned image of a letter from the IRS giving its blessing to the arrangement.


http://www.benetrends.com/IRS/IRSLetter.html

It's basically a question of whether I want to let the money sit in a conservative investment or use for something which could be more productive.