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Everything in your scenario works; except the middle part about loaning back 1/2 the money to yourselves. IRC §4975 effectively prohibits plan loans to owner-employees by considering you & your spouse as "disqualified persons".

thank you for pointing me in the right direction.

if you please, have a look at IRC §4975(d)(1)

The prohibitions provided in subsection (c) shall not apply to -
(1)any loan made by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan -
(A)is available to all such participants or beneficiaries on a reasonably equivalent basis,
(B)is not made available to highly compensated employees (within the meaning of section 414(q)) in an amount greater than the amount made available to other employees,
(C)is made in accordance with specific provisions regarding such loans set forth in the plan,
(D)bears a reasonable rate of interest, and
(E)is adequately secured;

so it would seem that, if the loan were interest-bearing and adequately secured by plan assets, and provision were made for such in the plan documents, then the plan could indeed extend loans to disqualified persons without such transaction being classified as a "prohibited transaction".


In addition to Badger's comment about the loans, let's make sure the Mrs. is actually working for the corporation doing something worth the salary. Otherwise her participation smacks of fraud.

hoss, you are now cottoning on to a key element of the plan - tax advantages are just a fringe benefit. "honey, i'm so very sorry, but the tax man INSISTS that you have to keep all the books instead of me, or we're going to lose our roth eligibility"....

i married an accountant. mama trepanne didn't raise no fools.

i guaran-damn-tee you my company generates enough bookkeeping to justify $15,000 in wages - especially if we cobble up a 401(k) plan that's loaning money back to ourselves...

You don't mention it, but I assume that you understand that you and the Mrs. will owe full income and employment taxes on the salaries, in addition to the corp's payroll tax liability.

all too painfully aware, my friend; i cut those checks every quarter.

the income taxes are a wash, since it either runs through a W-2 or a schedule K, and gets taxed at the same rate either way (i think). the extra load comes from FICA & FUTA and all that fun stuff.

still, though, it seems like a decent idea to eat these costs up front on a one-time basis (and remember, we're just talking about the load on $15K extra salary) in order to enjoy tax-free compounding for the rest of our lives.

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