We are looking into converting our S corp to a C corp so we can roll our 401K money into the company

1. Converting from an S corporation to a C corporation significantly changes the tax benefits available tro you. You would lose your ability to lower salary and increase dividends to shareholder employees, which helps save significantly on payroll taxes. You would also lose your ability to avoid double taxation on money left in the corporation or on proceeds from sale of the company. Yes, C corporations have different benefits, but it is crucial that you run this by your corporate CPA to see how this conversion would affect you.

2. Unless there is new legislation that I haven't heard of (and that is very possible), there are big penalties for early withdrawals of 401(k) money by recipients UNLESS the recipient is at least 59-1/2 at the beginning of the year AND payments are equally allocated (amortized) over his expected lifetime. These rules have applied to all funded retirement plans, regardless of the source of the funds. Ask the promoter why there would not be these penalties (what is the legislation that allows for this) - I would love to know the answer to see if the proposed tactic works as advertised.

3. If there are no penalties, and that rule only applies to C corporations, you might consider whether a new C corporation could serve you better than the existing S corporation. You could keep the old corporation with its benefits, and use the new corporation for the specific tax benefits available to it. You would have conversion and convenience issues, of course, which would weigh against this approach. Again, you must number-crunch this with your CPA to see what makes sense.

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