QUESTION 1: Does a portion of the C-Corp's earnings need to be retained in the C-Corp, to show evidence that this is a reasonable investment for the 401K plan?
ANSWER: The earnings can be reinvested back in the business or dividends paid to the shareholders. Therefore, because the 401k is a shareholder, the 401k plan’s share of dividends would flow to the 401k account.
QUESTION 2: Can the owner borrow from the C-Corp to invest in related active business activities? (Paying market interest rate, with written promissory note, etc.).
ANSWER: No because your 401k plan is a shareholder of C-Corp.
QUESTION 3: I want to make sure that this could not be viewed as a prohibited transaction, as long as its documented properly? Why would I do this: As a way to pull funds out of the C-Corp without triggering the taxes that I'd have with salary or dividend payouts.
ANSWER: Per the previous answer, this is not allowed.
QUESTION 4: Can the C-Corp make a loan to an LLC that I own, that would be used to purchase rental property? (as long as the loan carried market interest rate and was property documented). Does the C-Corp need to get a mortgage against that rental property?
ANSWER: No because your 401k is a shareholder in the C-Corp; as such the 401k owned Corp may not do business with any other business that you currently or will alter own.
QUESTION 5: At what point do the loans interfere with the C-Corp's standing as a real estate operating company?
ANSWER: See previous answer for answer to this question.
QUESTION 6: Can the 401-K's share be redeemed after a few years (after profits had accumulated), and the C-Corp converted to an S-Corp?
ANSWER: The C- Corporation can buy the shares back from the 401k (corporate share buyback). The proceeds would then be deposited into the 401k. Subsequently, the C-Corporation can be converted to an S-Corp.
QUESTION 7: Can my existing $46K loan from my solo 401K be transferred over to the new 401K? Or does it have to paid off and reissued?
ANSWER: Yes the solo 401k loan may be transferred to the new 401k provided the loan is not in default.
QUESTION 8: One additional question: I'm trying to get confirmation, if correct, that since the C-Corp is distinct from the 401K plan, that the C-Corp can engage in business dealings with me and my immediate family without having to worry about prohibited transaction or disqualified party rules. I assume that my C-Corp could pay my daughter's company for marketing work she performs, as long as the price is reasonable, correct?
ANSWER: No the C-Corp may not do business with other companies owned by you or disqualified parties such as your daughter, spouse, parents, grandparents, or anyone that provides services to your 401k.
John G. in Texas