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Asked 1/7/2010

Can I take a reduced salary and have my employer make a larger dividend contribution to my 401k?

I am considering going back to work for my family business. Let's say they are going to be paying me 60k per year. Can I take a reduced base salary of 30k and have them give me an annual dividend of 30k that goes straight to my roth 401k plan? Is this legal and do other people do this? I will still probably contribute the max $16,500 per year from my base salary which will keep me under the contribution limit of $49k per year from the employee and employer. It seems as though this would be legitimate because the dividend of 30k will not exceed my 30k base salary since the rule is the employer can only contribute up to 100% of your salary. Also, is there a special company 401k plan that needs to be set up for the employer to make dividend contributions like this? Will the dividend be tax free for me since the company has already paid taxes on the income? Serious responses only please, thanks a lot!

 
 
 
 
 
Answers

Answer 1/1 - Submitted 1/8/2010

You want to take this question to a CPA who is familiar with your business. You haven't provided nearly enough information for a reasonable answer.

The only quick comments I can make -- presumably this business is a Corporation, either S or C, as they are the only business entities that pay dividends -- dividends come out of current income, do you want to tie your income to the business's profitability? If the dividends are taxed at the company level, then you're making the other owners (family members) in the business foot your tax bill? Perhaps these aren't reasonable concerns for the situation you're in. The family CPA would have a better idea.

 
 
 
 
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