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fellow referred me over here; i'm a first time caller.

as background, i own an S corp where i'm the only employee, and am curious about the ability to treat employee elective 401(k) contributions as Roth IRA equivalents.

the following is the text of an email i sent recently, slightly edited.

not looking for legal advice, mind you; just looking for the catch in what seems like a natural strategy for attempting to game the system.

and before you ask: yes, i would indeed be willing to do 300 hours of paperwork per year in order to save $0.50, thank you very much.



Can Trepanne Capital Management set up a Single-Participant 401(k), put Mrs. Trepanne & I both on the payroll, make zero employer contributions,allow each of Mrs. Trepanne and I to make elective contributions of $15,000 apiece, allow each of us to immediately borrow back half the money

lather/rinse/repeat every year from 2006-2009, repay all the money
($30,000 apiece) at the end of 2009, and then roll the whole shebang
over into Roth IRAs?

So that, effectively:
1) we forgo a tax deduction we don't need right now while our earned income is relatively low (or can be caused to be so), and federal taxes are at historically favorable rates
2) we gain the right to make extra-large contributions that will wind up in Roth IRAs
3) we don't even lose use of half the liquidity in the meantime, except for a brief period of time while the combined contribution/reborrowing transactions are being processed

Somehow this sounds a little too good to be true.

What do you think?
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