What do with current 401K now that I'm starting a business

[Guest Jack_Norton]

Let's say I work for a big company. I have a nice 401k plan with a bunch of money in it. Now I want to quit my job and start my own business. I don't want to touch the 401k money until retirement age of course. In fact I would want to keep contributing now that I have my own business. My question is how do I handle this? Can I set up a 401k or IRA for my company and roll it over or what? How would I do something like that? Thanks.

[Guest Dianes]

My suggestion would be to set up a 401(k) plan for your new company, allow immediate entry into the plan and rollover your 401(k) money into your new plan. You could ammend the plan immediately to require a minimum hours of service, age requirement, 12 month wait, etc. if you don't want future employees of your new firm to have a waiting period before they enter the plan. This would avoid a taxable distribution and the 10% early withdrawal penalty (assuming you are not 59 1/2 years or older in which case the early withdrawal penalty will not apply).

As far as going about setting up a plan, I would suggest that you contact a Retirement Plan Third Party Administration firm (TPA) that drafts plan documents or an attorney that specializes in retirement plans. You will have investment advisors tell you that you can just adopt their company's prototype document, but personally, I have seen numerous problems with this approach.

[Guest Kevin Plymyer]

What if the new company is small? Wouldn't a 401(k) plan with annual administrative costs and start up fees be expensive? Maybe a simple plan would work better. Also, if you were to adopt a 401(k) plan, instead of the amendment mentioned above you could have a provision that states that everyone employed on the effective date of the plan is eligible immediately, all new hires must meet the following: 1 year of service age 21 or whatever your eligibility requirements would be. This would avoid the expense of the amendment. These are complicated questions to answer with limited knowledge of your situation. The good news is that you are not required to take a distribution from your current employers' plan if your account balance is over $5,000. This will give you time to research all of your options before making any commitments.

I sure hope this helps.

[Bill Berke]

You have lots of options. You could leave the money with your present employer (if it's more than $5,000) and then withdraw sometime in the future - depending upon whether the investment choices/results and distribution options of the current plan are acceptable to you.

You could take your money and rollover to an IRA which would give you greater investment control. And, as long as you didn't comingle with other IRA money, you could eventually transfer this IRA to your company's plan (a "conduit" IRA). One consideration is that if you move your current 401(k) money to an IRA, it will be subject to your creditors. If you leave the money with your current employer's plan, the money will not be subject to your creditors. Something to think about if you are starting you own company.

Make sure your own company's plan permits rollover money. Something you want to consider carefully if you plan on growing and having employees. Permitting employee rollover money has fiduciary implications for you, the owner. Your new company could start a 401(k) or regular profit-sharing plan, as mentioned above, but jumping immediately into a new plan for a start-up is fraught with potential problems. We find that, in almost all cases where you plan on growing, waiting a year or two is wiser and cheaper. You don't lose anything regarding the handling/benefits of your current 401(k) money if you plan carefully now. And if a financial salesperson tries to encourage you to immediately start a plan, remember that many prototypes (the type of documents they sell) are not always broad enough to fit a start-up's early growth issues. To emphasize - plan out and evaluate all your options carefully.

[Guest Jack_Norton]

So far thanks for the input. To be more specific, yes I have more than $5k in my current 401k. Yes, the new company will have only a few to several employees for the first year or two. So what I'm hearing is to perhaps just let my current 401k money sit there (in the current employer's 401k) for a year or two. The logic being, the money will be protected by creditors, and I won't have to pay for administration. Then after that, if things are going well with my new company, either roll it over into an IRA or my new 401k. By then, hopefully, we'll have a bigger employee base, and perhaps it'll be time to put in a 401k anyway. Does this sound logical? Pleas, I'm open to more advice. Thank you.

[pmacduff]

I agree with everyone above, however a reason that I would offer that you may want to consider a new plan would be the benefits to you personally. You will be able to put more away in a Qualified Plan than you would in an individual IRA and, depending on your AGI, you may not even be eligible for a deductible IRA. Much would depend on the nature of your new business and what your anticipated salary or income might be expected to be in your first few years. I think a good starting place is with one of your local Third Party Administrative firms but I would go to someone highly recommended that DOES NOT sell investments but is purely administration. They can help you examine the options and what might be best for you. More than likely they will not be as expensive as an attorney and not as "product driven" as your Investment person or a TPA firm who sells investments.

[Bill Berke]

I agree with PMacduff. In addition to a 401(k), when the time comes to consider a plan, you may also want to look at a SEP or a SIMPLE. The SEP does not permit employee contributions, but may particularly benefit you if few or none of your employees are eligible at the time you put in a plan. A SIMPLE does permit employee contributions (the new company/poor man's 401(k)), the beauty is that you (the company) only match those employees who contribute - up to 3% of their pay. And there are no discrimination testing requirements or IRS filings (returns). The downside may be that the employee is limited to a maximum deferral of $6000. Many employees cannot afford more than $6000, so this may not be an issue. However, the $6000 can be as much as 100% of pay (an interesting result for new owners). Both a SIMPLE and a SEP are very easy to set up and have no fees or administrative costs attached. But you trade simplicity and inexpensive for certain limitations. Many new firms do a SEP or SIMPLE for the first year, two or three (without any problems), then switch to a 401(k) when the company is prepared for those costs and considerations. And we do have new companies start with a 401(k), although it is very rare. Which is why PMacduff's advice is so critical - go to an independent advisor who can explore all the possibilities without prejudice.