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Author: BigOFool Two stars, 250 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25223  
Subject: Business 401k or not? Date: 7/13/2012 11:56 AM
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I have a question or more to the point are looking for advice in my particular situation. I work for a company that offers me a 401K with a match up to 6%. My wife’s job offers a 403B with no match. We are both contributing the max allowed. Me $22,500 (I’m over 50), my wife $17,000. Both plans are pretty lousy when it comes to investment choices and I would really like to be able to invest the money my self using the Fool. I have a small business that provides enough income for us to be able to maximize our contributions to these plans. I was thinking if it would be best to start a 401k in my company, stop contributing to our employer’s accounts and contribute to the 401k of my business? (That is if I can create a 401k that would allow investments in stocks).

If I would do this I would still contribute to my employer’s 401k (6%) in order to preserve the match. I know there is some costs associated with having a 401k plan for my business but I believe that being able to control how the money is invested will more than make up for this.

I know there are people in this board that know a whole lot about these matters and was looking for ideas and/or advice about my particular situation.

Also my company has about 15 employees all of them working part time. I thought this information might be important if I was to match any 401k money (if this is at all possible).

Thank you all for you comments and/or advice in advance.

Fool On!

Big O Fool
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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24915 of 25223
Subject: Re: Business 401k or not? Date: 7/13/2012 3:53 PM
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I work for a company that offers me a 401K with a match up to 6%. My wife’s job offers a 403B with no match. We are both contributing the max allowed. Me $22,500 (I’m over 50), my wife $17,000.
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I have a small business that provides enough income for us to be able to maximize our contributions to these plans.


Your total annual contributions as an employee are limited to $22,500 or $17,000, depending on your age. Just to make things simple, let's assume you make $100k at the company that offers the 6% match and $50k at your own company. Since you are over 50, that means that you could contribute $6,000 to your employer's 401(k) in order to get the match, and you could contribute $16,500 to your own company's 401(k), for a total contribution of $22,500.

Is your wife also employed by your company? If not, she is stuck with the 403(b) plan that she has through her employer - you can't contribute to a 401(k) for her if she's not your employee - she has to contribute her own compensation to a 401(k). If she is employed by your company, she can contribute up to her entire salary from your company (minus Social Security & Medicare taxes) to your company's 401(k), up to the $17k that she is eligible to contribute. If she doesn't make enough at your company to contribute the whole $17k to your company's 401(k), she can contribute the difference to her 403(b).

If you, as individuals, contribute to more than one plan, it's up to you to make sure you don't go over the $22.5k/$17k that you are eligible to contribute.

Also my company has about 15 employees all of them working part time. I thought this information might be important if I was to match any 401k money (if this is at all possible).

Well, this adds some complexity, and will probably cost you some money if you want to max out your contribution to your own company 401(k), instead of putting money into your employer's 401(k).

Your 401(k) plan would have to be offered to all employees. As the owner of the company, you contibutions be limited by the 'highly compensated employee' rules unless you provide a 'safe harbor' plan. 'Safe harbor' plans require you to offer matching for your employee's contributions.

I would say with your situation, it would be best to consult a professional about what types of retirement plans are available to you as a business owner, and how you can best accomplish your goal of being able to invest in more investment choices than you have in your employer's 401(k).

Also, remember that 'retirement investments' don't have to be in a 401(k), 403(b) or some other 'designated' retirement plan. Taxable accounts can be used, too.

AJ

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24916 of 25223
Subject: Re: Business 401k or not? Date: 7/13/2012 4:07 PM
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Hey AJ, could he not also consider a SEP or a SIMPLE for the business?

Depending on the status of those parttime workers and how long they work for the company, the OP might be able to get around the requirement to fund retirement accounts for them (or fund them a lot).

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24917 of 25223
Subject: Re: Business 401k or not? Date: 7/13/2012 4:23 PM
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Hey AJ, could he not also consider a SEP or a SIMPLE for the business?

Yes, that's why I said I would say with your situation, it would be best to consult a professional about what types of retirement plans are available to you as a business owner, and how you can best accomplish your goal of being able to invest in more investment choices than you have in your employer's 401(k). I didn't specifically mention SEP or SIMPLE, but they are a couple of the other types of retirement plans that I was referring to.....

However, I think that his situation is complicated enough (with a significant number of part-time employees, etc.) that he really should be using a professional, rather than a message board, to get any answers beyond 'Yes, it is possible for you to set up retirement plans at your company' because if the retirement plan(s) he sets up are incorrectly utilized, it could cost him a whole lot more money than what he perceives he's losing by not having good investment choices in his current employer's 401(k).

AJ

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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24918 of 25223
Subject: Re: Business 401k or not? Date: 7/13/2012 11:53 PM
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Big O'

Just wanted to add to the other posts.
Here are my assumptions, please correct any if they are wrong.
-You are a non owner w2 employee at the company that offers the 401k and offers the 6% match.
-You are the sole 100% owner of the business that employs 15 part time employees
-You earn at least $25,000 at the business you own
-The 401k you participate in is not satisfactory because you feel you can do better than investing in individual stocks rather than mutual funds that invest in stocks

Contribute to the 401k where you are a non owner W2 employee to take full advantage of teh company match.

Any remaining dollars below your $17k and $5,500 catch up limit will go to the 401k at your company that you own.
This will work if your part timers are truly part time. You can exclude part time employees from a 401k. You can not exclude part time employees from a SIMPLE or a SEP. In a SIMPLE once an employee earns $5,000 in 2 consecutive years and is reasonably expected to earn $5,000 in the third year, they will be eligible. In a SEP. once they earn $550 in at least 3 of the preceding 5 years they are eligible. Also, in a SEP there is no Employee contributions, so if the business gives you money, you have to give all eligible employees money on a pro rata basis.

The 401k option will allow you to exclude part timers provided that they do not work 1,000 hours, are under 21 and have been there less than 1 year. If someone hits all 3 of those marks, they will be eligible. If any of your 15 eligible meet those requirements, then as AJ pointed out a Safe Harbor Plan would be best. You would only give money to those employees that contribute their own money via a Safe Harbor Match. A match on nothing is nothing.
So, in summary:
Contribute 6% of pay to your employer where you are w2.
If you have no eligible employees at the company you own, set up a Single K (Solo-k, Uni-k, individual-k, etc).
Contribute the balance of your deferral limit, and as long as you have no eligible employees, you may also give yourself an employer contributioo.
If you have eligible employees, set up a Safe Harbor 401k with a match, you contribute the balance of your deferral limit, you also get the match. You will have to match any employees that may contribute as well.
Safe Harbor Plan needs to be established prior to October 1st.
Single K needs to be established by 12.31 but need not be funded until your tax filing deadline plus extensions.
Post back any info I may have musunderstood, or if you have questions.

Bill

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Author: BigOFool Two stars, 250 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24919 of 25223
Subject: Re: Business 401k or not? Date: 7/14/2012 8:13 PM
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Thanks everyone for your help!

Bill you got all the assumptions correct. I have a couple of questions:

First you wrote " part timers provided that they do not work 1,000 hours, are under 21 and have been there less than 1 year. If someone hits all 3 of those marks, they will be eligible" did you mean over 21.

Second, if I had eligible employees can the 401k be created without a match option? If the has to be a match option is there a minimum percentage that has to be mathed?

I know I should consult a professional to set this up but I want to e well informed before doing so. I have read many post on this board Ang feel that you guys have a lot more knowledge tan me and will send me in the right direction.

Do any of you recommend any specific company to create the 401k? I know intuit provides this service for small businesses. I do my payroll with them and have quikbooks online and I thought it might be a good fit.

Again thank you all for all your help/advice.

Big O

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24920 of 25223
Subject: Re: Business 401k or not? Date: 7/15/2012 12:46 AM
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First you wrote " part timers provided that they do not work 1,000 hours, are under 21 and have been there less than 1 year. If someone hits all 3 of those marks, they will be eligible" did you mean over 21.

No. Those UNDER 21 can be excluded, not those OVER 21.

http://www.irs.gov/retirement/article/0,,id=119625,00.html

Second, if I had eligible employees can the 401k be created without a match option? If the has to be a match option is there a minimum percentage that has to be mathed?

As the owner of the company, if you do not provide a safe harbor match, you will be limited in the amount that you can contribute by the 'highly compensated employee' rules. So, yes, you can set up a 401(k) without providing a match, but you may limit your ability to make your own contributions.

Here are the requirements for the safe harbor match, from the previous link:

Safe Harbor 401(k) plan

Under a safe harbor plan, you can match each eligible employee’s contribution, dollar-for-dollar, up to 3 percent of the employee’s compensation, and 50 cents on the dollar for the employee’s contribution that exceeds 3 percent, but not 5 percent, of the employee’s compensation. Alternatively, you can make a nonelective contribution equal to 3 percent of compensation to each eligible employee’s account. Each year you must make either the matching contributions or the nonelective contributions.


AJ

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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24921 of 25223
Subject: Re: Business 401k or not? Date: 7/15/2012 11:05 AM
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So,
If your employees dont hit all 3, 1,000 hours, 1 year of service, and 21 years of age, they can be excluded. If any of your employees hit any of those, they will be eligible. The concern as AJ pointed out is discrimination testing which will limit your ability to contribute based on the amounts they contribute. The bigger concern is Top Heavy testing. If you control 60% or more of Plan assets, the Plan will be deemed top heavy and you will have to give 3% of pay to ALL eligible employees.
By utilizing the Safe Harbor design, and doing the Safe Harbor match, you are exempt from Discrimination testing and top heavy testing. You only give the match to those employees that participate. If no one participates, there is no cost in terms of the match and you are able to maximize your contributions as well as receive the match if you decide to do so.
If none of your employees are eligible, the above does not apply and you can do a Single-K (Solo-k, Uni-k, etc.

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