January 23, 2017 at 6:06 pm #67392
A reader recently reached out to us after reading our ROBS article with the following concern:
“I’m concerned about double taxation due to the C corp structure requirement. When the operating C corp earns income it will pay tax on all its income. When it later liquidates or pays a distribution some money will flow back into the 401k. When I withdraw that money from the 401k will I have to pay personal income tax on that again?”
Double taxation is always a concern small business owners have with the C corp structure. But keep in mind that typically only dividends are subject to “double taxation.”
But with a ROBS, the portion of dividends that flow back to the 401k will have taxes deferred until they are withdrawn (presumably at retirement). Those dividends get to grow tax free just like normal 401k contributions. The same goes for the proceeds from selling the business that are owed to the 401k. In this way, it isn’t being taxed differently than many other stock commonly held in a 401k. As with any traditional 401k, when you eventually withdraw funds, those funds are subject to personal income tax.
Importantly, the owner’s salary doesn’t typically receive double taxation as it is usually a pre-tax expense for the C corp.
If you’re considering a ROBS, we recommend speaking with the professionals at Guidant. Their free consultation will help address any questions you might have. Their experience and professionalism will allow your business to move forward with confidence.