back-door Roth scheme
JGE
I recently heard about the following scheme for a (semi-)retired
person to
sneak money into a Roth ... Set up an S-Corp. Pay yourself a
paycheck
from it. Do a solo-401K to convert the "paycheck" money from taxable
to
tax-sheltered. The S-Corp gives you negative income, which you offset
with
a Roth conversion.
Does this make sense, and is it legal ?
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Mark Bole
> I recently heard about the following scheme for a (semi-)retired
> person to
> sneak money into a Roth ... Set up an S-Corp. Pay yourself a
> paycheck
> from it. Do a solo-401K to convert the "paycheck" money from taxable
> to
> tax-sheltered. The S-Corp gives you negative income, which you offset
> with
> a Roth conversion.
>
> Does this make sense, and is it legal ?
>
S-corp can have a lot of overhead costs (including state taxes), and
there would payroll taxes on the wages, so right away you are in the hole.
Then, how do you convert a 401k to a Roth while you are still an employee?
If the whole scheme has no other purpose than to get around some tax
law, it could most likely be disallowed for tax purposes.
-Mark Bole
JGE
> JGE wrote:
> > I recently heard about the following scheme for a (semi-)retired
> > person to
> > sneak money into a Roth ... �Set up an S-Corp. � Pay yourself a
> > paycheck
> > from it. � Do a solo-401K to convert the "paycheck" money from taxable
> > to
> > tax-sheltered. �The S-Corp gives you negative income, which you offset
> > with
> > a Roth conversion.
>
> > Does this make sense, and is it legal ?
>
> S-corp can have a lot of overhead costs (including state taxes), and
> there would payroll taxes on the wages, so right away you are in the hole.
Ya, I figure that's where the rub is.
> Then, how do you convert a 401k to a Roth while you are still an employee?
The 401K simply reduces AGI, allowing corresponding dollars of Roth
conversion.
Since 401K and traditional-IRA are very similar vehicles (as compared
to Roths
and taxable accounts), the money that you put into 401K "flows" into
Roth.
> If the whole scheme has no other purpose than to get around some tax
> law, it could most likely be disallowed for tax purposes.
Joke ?
Phil Marti
> I recently heard about the following scheme for a (semi-)retired
> person to
> sneak money into a Roth ... �Set up an S-Corp. � Pay yourself a
> paycheck
> from it. � Do a solo-401K to convert the "paycheck" money from taxable
> to
> tax-sheltered. �The S-Corp gives you negative income, which you offset
> with
> a Roth conversion.
>
> Does this make sense, and is it legal ?
As already noted, there are expenses involved. I'm also wondering
what the source of the contributions is. IOW, what's the "semi" part
of retired, and why isn't it a basis for Roth contributions? I'm also
wondering why the genius who thought this up wants to go through the
mishegas of trumped-up salary -> traditional 401(k) -> Roth IRA. Why
not just set up a Roth 401(k)?
No, it's not legal. You can't just make up numbers and put them on a
tax return. It's called fraud.
Phil Marti
Clarksburg, MD
Stuart A. Bronstein
>> If the whole scheme has no other purpose than to get around
>> some tax law, it could most likely be disallowed for tax
>> purposes.
>
> Joke ?
No, the courts give the IRS the power to ignore any transaction that
has no real purpose other than to save taxes.
--
Stu
http://downtoearthlawyer.com