How to Use 401(k) Funds to Start a Nonprofit (Avoiding 10% Penalty)

Today, Anderson Advisors attorneys Barley Bowler, CPA, and Eliot Thomas, Esq. discuss topics including how 401(k) funds can be borrowed up to $50,000 without tax penalties while confirming that backdoor Roth IRA contributions made in 2024 but converted in 2025 still allow for additional 2025 contributions. Eliot and Barley discuss why S-corporations cannot deduct wellness expenses through accountable plans unless medically prescribed, and confirm the 20% Qualified Business Income deduction applies across multiple businesses. For entity structures, they recommended against holding appreciating real estate in corporations, favoring disregarded LLCs for asset protection. Regarding trading partnerships with C-corporations, these need written contracts for guaranteed payments, and confirmed short-term rental owners can switch to self-management to claim material participation benefits and accelerated depreciation through cost segregation.

Send your tax questions to taxtuesday@andersonadvisors.com.

Highlights/Topics:

• "Are there ways to withdraw funds from a 401(k), a retirement account, without moving it into an IRA?" a sponsored plan versus an individual plan? "We're also starting a nonprofit business. And how can we avoid that 10% early withdrawal penalty?" - Take a loan from your 401(k) for up to $50,000 without tax/penalty.
• "I attempted to do a backdoor Roth IRA conversion. On December 24th, I did it at the end of the year. I'm a high-income earner, was not aware of the financial institution, and had made a temporary change. There was some hold time for the funds. We made a deposit contribution at the end of the year. The question here is, the $7000 post-tax contributed to the traditional IRA in December was not available to convert? We went over the past the end of the year to the 2025 tax year, and we're wondering how that's treated since the conversion was completed in 2025, but the contributed contribution occurred in 2024. Is another $7000 contribution allowed?" - Yes, you can make another $7000 contribution in 2025 for another conversion.
• "Can we use this to reimburse for gym membership, supplements, wellness plans, stuff like that?" - No, wellness plans aren't tax-deductible unless medically prescribed.
• "My S-corporation provides financial services." Another question. We're talking about the qualified business income deduction, that 199A. That's a pretty good deduction, 20%. Good chunk of deduction. "Can we take that if we have two different businesses? How does that work? What's that look like?" - Yes, you can take the 199A deduction for both businesses simultaneously.
• "I have two LLCs holding trading accounts, so a couple of different LLCs." We're going to talk about our trade structure a little bit differently. We also have just what we call a safe asset holding straight. If we have a brokerage account, high-value collectibles, or something like that. "Does putting a rental property into a disregarded LLC have any tax benefits?" "Can I transfer the interest of a disregarded to a holding company or to a living trust?" - Yes, with in-kind transfers; check with a broker; generally no tax consequences.
• "I have a trading partnership." "Do I need a contract?" We're talking about guaranteed payments here, a very unique payment to a partner. - Yes, need a written contract detailing services between a partnership and C-corp.
• "What are the pros and cons of holding real estate investments in a disregarded LLC, C-corp versus S-corp?"- Avoid S/C-corps for appreciating property; use disregarded LLCs with management entity.
• "We're buying our first short-term rental this year. Considering using a third-party property manager, can I manage the property next year with material participation?" - Yes, you can manage it yourself in year two and claim cost segregation benefits.

 

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