Did you know there is a way to convert your business accounts receivable received from selling tangible personal products into your 401(k) as an investment while reducing your business taxes and receiving tax-free income all at the same time? This is a little-known tax strategy that is permitted by the pension rules but not promoted by banks, insurance companies or investment firms (there is no product for them to sell).

Anyone that has a business and sells tangible products to customers on an account can set up this program for their personal benefit.

The person/business needs to have a personal 401(k) plan or pension plan established and then needs to undertake the setup of this accounts receivable sale process. Both of these plans are unique and flexible to permit this process and still stay within the guidelines set down by the tax law.

Anyone can undertake this process at any point during the year. Once the process is established the business can begin selling receivables into the pension as an investment.

These plans have specific requirements for both set up and operations, therefore, it is important to have someone knowledgeable about them for guidance, help, establishment and operations.

The main benefits from establishing these plans are:

• They provide a much better investment return for your pension plan (generally greater than 30 percent per year).

• The investment in your pension plan is one that you are extremely familiar with, i.e. customer accounts receivables, and you have operational control.

• The new plan does not affect your annual ability to make your annual contributions to the plan.

• It permits fast build up of assets for you and your spouse.

• That they can be structured so that income will accumulate tax-free for distribution upon retirement.

• Because these assets are within your pension plan they are shielded from creditor claims.

You have the ability to achieve an extremely fast build up of assets and income in your retirement plan as well as reducing your business taxable income while converting that business income into tax-free retirement income. This is the best of both worlds, reducing business taxes, increasing retirement income and saving taxes on retirement distributions all at the same time from doing virtually the same thing that you're doing right, collecting customer accounts receivable.

Ken Lindow, CPA, MBA, lives and works in Ahwatukee Foothills. Contact him with tax questions or column topic ideas at (480) 940-8351 or Ken@LindowCPA.com.


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