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
Ya, I figure that's where the rub is.
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.
Joke ?
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
No, the courts give the IRS the power to ignore any transaction that has no real purpose other than to save taxes.
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