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How to Use Your 401k Funds to Start a Business - One of the biggest challenges entrepreneurs face, after coming up with their idea, involves financing that new business. If you've been working for some time, you've no doubt had the opportunity to set aside some money to use for this purpose. On the other hand, that savings may not be enough. Did you know there might be a source close to home? It's sitting right there in your 401k plan. This strategy is referred to as "Rollovers As Business Startups" or "ROBS."
Why Small Business Owners Often Resist 401ks - At a time when many companies are boosting 401k benefits to attract and retain employees in a tight labor market, 74% of small businesses still do not offer a retirement plan for their employees, according to survey data published by ShareBuilder 401k. According to the survey, many small business owners mistakenly believe their business is simply too small and that 401ks are too costly.
Small Business Owners Still Resistant to Starting a 401k Plan: Survey - At a time when many companies are boosting 401k benefits to attract and retain employees in a tight labor market, 74 percent of small businesses are still going without any plan at all. The survey, that polled 500 small business owners from across the country, reveals that only 26 percent currently offer a 401k plan. Responders cited three main reasons for not starting a plan.
The Problems With Free and Small Retirement Plans - There is no such thing as a free lunch. There is no such thing as free advice or a free retirement plan. Those retirement plans that are geared for small businesses like a SEP-IRA or a SIMPLE-IRA are great options, there is a cost for them even though they are "free." This article is about the costs and caveats for these small business retirement plans.
Resources
A glossary retirement plan and investment terms available here.
401k Plans for Sole Proprietorships
Regulatory reform now allows Sole Proprietorships to set-up and contribute to a 401k plan. These are often called Solo 401k or Individual(k) plans. A number of vendors are beginning to market specific plans to meet this need.
General Features of a Solo 401k Plan:
| Plan Establishment |
Sole proprietors with no additional employees other than the spouse of the proprietor or partnerships whose only employees are self-employed partners and their spouses. |
| Trustee and Plan Administrator |
Business Owner, Spouse or Partner or any combination, or any other designated third party. |
Salary Deferral
Contributions |
Up to $20,500 (not to exceed 100% of pay and no more than $305,000 of pay can be taken into account). Total salary deferral and employer maximum is $61,000. |
Catch-up
Contributions |
Individuals age 50 or older may contribute an additional $6,500 in salary deferrals beyond the $20,500 which does not count towards the maximum total contribution limit of $61,000. |
| Employer Contributions |
Up to 25% of pay (20% for self-employed) to a maximum of $61,000. Salary deferral contributions are also counted towards this limit. |
| Rollovers |
Rollovers and transfers allowed from traditional IRA, SEP, Qualified Plans or Keoghs (Profit Sharing, Money Purchase Pension, Defined Benefit), 401k, 403(b) and governmental 457 plans. SIMPLE IRAs are eligible for rollover after two year holding period is met. |
| Loans |
Available to all participants, including unincorporated business owners. |
| Government Reporting |
IRS 5500-EZ. |
401k plans are subject to numerous and complex rules, regulations and tax qualification requirements. Be sure to consult with a qualified professional before making any decisions. |
Information on Small Business Plans
Starting a small business retirement savings plan can be easier than you think. Here are some resources on a varity of retirement plans available to the small business person.
Small Business Retirement Plan Options - 2021 -- This chart compares four common types of plan designs often utilized by small employers.
DOL's 401k Plans for Small Businesses
Choosing a Retirement Plan for Your Small Business -- In this piece you will find a chart outlining the advantages of each of the most popular types of IRA-based and defined contribution plans and an overview of a defined benefit plan.
Retirement Plans FAQs Regarding SEPs
FAQs Regarding SIMPLE IRA Plans
SEP Retirement Plans for Small Businesses
Simple IRA Plans for Small Businesses
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