Benetrends.com and Rainmaker plan

[JoshinNC]

Anybody heard of these folks. Client called this morning and said he is going to roll his 401k over into a plan that these folks are going to set up and then the new plan is going to buy the stock of a corporation he's going to set up so he can essentially fund the start up of the business without incurring penalties on the funds coming out of the 401k. My first thought was that this sounds like self dealing and would create penalties on the withdrawal of funds, but the website says they have favorable letters of determination from the IRS blessing these plans. I have attached a link to their site below with the sample letter.

Again, anybody ever had a client do something similar?

http://www.benetrends.com/rainmaker/index.php

[JohnH]

Josh:

I don't know how to link to other threads, but if you'll search on this ---> IRA distribution to start business without penalty? <--- you'll find a discussion about this going back just a couple of weeks.

For what it's worth, I wouldn't have anything to do with it no matter how much documentation the promoter provides. I'd give up the client before being involved in one of these schemes, and have said this directly to clients in the past.

[S T]

IRA Distribution

Here's the link from the prior thread

http://www.thetaxbook.com/forums/showthread.php?t=9180&highlight=distribution

Sandy

[sea-tax]

Josh,
In the words of TeddyKGB in the movie Rounders " this one no good for you". I would take JohnH advice.
Personally have heard some horror stories, plus you may want to check with your BD to make sure that this is an approved transaction and not going to get your license yanked.

Side note : Why do clients try to stretch so hard to get something to work. I had a client the other day call and tell me that he was going to cash in his IRA of 60k to buy a house that he would flip and resell in 30 days and then put the money back into his IRA in 60 days. He asked what I thought? I told him to listen carefully to the words that are coming from my mouth "this one no good for you", He said thanks and did it anyways. Some people are there own worst enemies.

[JohnH]

Your story about the client asking for advice and then doing what they want anyhow reminds me of something that happened several years ago with a church member. She had asked if I could get a paticular tax form for her, and I explained why she didn't need the form because she should not handle the matter in they way she had proposed. A week or two later she approached me and said she had gotten the form from another accountant and went ahead & filed it - she just wanted me to "know it worked.".

A third church member was standing beside me during this conversation and he asked if it bothered me that she had done this after being told it was not a good idea. I replied, "People pay me for advice they don't follow, so why should it concern me that someone ignores advice I gave them for free?"

[RJM]

Josh, this is a prohibited transaction. Penalties and interest can actually exceed 100%. Maybe ask your client to first see an ERISA attorney for review, before you drop the client. There are several firms at work around the country that do this stuff usually with intermediate entities designed to make any potential auditor blind to the substance of the transactions, and every so often one of these firms gets busted. The poor investors often lose everything in their retirement plans. -Bob

[JoshinNC]

I started asking questions as soon as he said it

Josh, this is a prohibited transaction. Penalties and interest can actually exceed 100%. Maybe ask your client to first see an ERISA attorney for review, before you drop the client. There are several firms at work around the country that do this stuff usually with intermediate entities designed to make any potential auditor blind to the substance of the transactions, and every so often one of these firms gets busted. The poor investors often lose everything in their retirement plans. -Bob

I will be recommending to him that he not do this based upon my early suspicions and the comments here. Anyone have handy the code sections regarding prohibitied transactions and self dealing?

[RJM]

ERISA and IRC

Josh, the prohibited transaction rules are spelled out in ERISA statute section 406 (just google it). The IRC 4975(c)(1) section is piggybacked to the ERISA definition of "prohibited transaction". There is lots of case law, to give better idea of what the definitions mean in real life! -Bob

[sea-tax]

Josh
May I also suggest a solution, that may work. How about working with the client and a local banker to see if the client can qualify for a SBA loan. I know in the past that these were very difficult to obtain. However many banks have streamlined the process. I have worked with a few they have all been with Well Fargo. It might be worth a shot.

[JoshinNC]

Our firm has culivated a relationship with a local CU

Josh
May I also suggest a solution, that may work. How about working with the client and a local banker to see if the client can qualify for a SBA loan. I know in the past that these were very difficult to obtain. However many banks have streamlined the process. I have worked with a few they have all been with Well Fargo. It might be worth a shot.

that is the largest SBA lender in NC. We recommend several cases per year to them already. I will definately bring this option up to him.