Retirement is a lifelong investment that ideally begins at the start of your career. The Balance reports today; the average person changes jobs ten to fifteen times (with an average of job changes) during his or her career. A survey by Deloitte also found that two-thirds of millennials plan to leave their company in five years or less. Whether you’re looking for greater fulfillment or more compensation, you want to make sure your retirement plan takes the move with you. Since you can’t just throw your retirement plan in a brown box like you can with your desk supplies, it’s important to know how you can move your 401(k). Typically, you have three options that all come with pros and cons: You can leave your 401k plan with your former employer, roll over your account into an individual retirement account (IRA) or transfer your old 401(k) into your new company’s plan.
If you are making a job change soon, here’s some insight on what you can do with your 401(k):
Have you borrowed from yourself?
Changing jobs is very exciting, but you need to make sure you deal with your outstanding loan if you borrowed money from your retirement plan. If you’ve borrowed any money from your 401(k), you need to pay it in full before leaving the company. Typically the loan balance is due within 60 days from the day you leave your company, whether you are terminated or got a new job. If you fail to repay the loan and you are under the age of 59.5 the amount owed will become an early withdrawal which can add an additional 10 percent tax penalty and or additional fees if you are under the age of 59.5.
Photo Courtesy of My Financial Design
The IRS will treat the loan as an early withdrawal from your 401(k) retirement plan. If you fail to pay back the loan within the fixed period, it may become a very costly decision. Luckily, if your loan becomes a tax liability, employers do not report defaults to the credit bureaus, so your credit score will not be affected. However, you should still avoid borrowing from your nest egg, being that most won’t be able to pay back the amount borrowed within the 60-day window. Be sure to check with your HR department before you leave to find out what the rules are on 401 (k) loans when an employee leaves the company.
Photo Courtesy of Huffington Post
Leaving Your 401(k) with Your Former Employer
While this may be convenient, leaving your monies at your old company’s plan limits your investment choices. This is usually an option when you have a certain balance amount; typically $5,000. Most companies will permit you to keep your retirement savings in their plans after you leave your company. If your balance is less than $1,000, your employer may close your account and send you a check for the balance. While procrastination may be the main reason 401(k)s are left at your old company, you may want to stick with leaving your 401(k) at your old company until you are ready to make an informed decision. Depending upon your plan, some plans limit the number of transactions, assess extra service fees or restrict beneficiary options for terminated employees. Leaving your money in a 401(k) does offer ultimate creditor protection. Federal law prohibits creditors from ceasing 401(k) accounts.
Roll Your 401(k) over into an IRA
You may want to consider rolling your 401(K) into an IRA. Majority of people roll their money over to an IRA because it offers more investment options. For some, having the opportunity to pick and choose any variety of funds is important to them. If you contribute to your employer’s retirement plan, you may end up with lesser options chosen by the plan administrator. You can also rollover other 401(k) accounts you have with other employers into one IRA, making it easier to track your money.
Some may be hesitant to roll over, due to the fear of extra taxes. If you roll over your employer-sponsored plan efficiently, there should be no tax consequences of moving your funds into an IRA. With regards to taxes when rolling over, you should look to use a direct rollover method to prevent tax consequences. Also, a rollover from a traditional 401(k) should enter a traditional IRA. A rollover from a Roth (401(l should result in a Roth IRA. Additionally, if you roll over from a traditional retirement plan into a Roth IRA, you will have to pay income taxes on the money. When deciding if you should roll over to an IRA you may want to consider your personal situation and preferences. It’s important to note that with an IRA, you can get back on track with your retirement savings months before you are eligible for a new employer’s 401(k).
Roll Over 401(k) into Your New Employer’s Plan
This can be a great option, being that you join a company that allows you to participate in their 401(k) right away. Seek out if your new employer has a defined contribution plan that allows rollovers from other plans. Reiterating, you will be limited regarding investment choices, but a big benefit is credit protection. If you have the option, you may want to do a direct, trustee-to-trustee, transfer from your old retirement plan to your new employer’s plan. Transferring your old 401(k) currencies to your new plan may make it easier to track your retirement savings.
The world of retirement planning is not always so straightforward. Research all the details of your current account and consult tax professional and other advisors with any questions to avoid costly mistakes.
Business entities can be defined as the corporate, tax and legal structures which an organization chooses to officially follow at the time of its official registration with the state authorities. In total, there are fifteen different types of business entities, which would be the following.
- Sole Proprietorship
- General Partnership
- Limited Partnership or LP
- Limited Liability Partnership or LLP
- Limited Liability Limited Partnership or LLLP
- Limited Liability Company or LLC
- Professional LLC
- Professional Corporation
- Nonprofit Organization
- Cooperative Organization
As estates, municipalities and nonprofits do not concern the main topic here, the following discussions will exclude the three.
Importance of the State: The Same Corporate Structure Will Vary from State to State
All organizations must register themselves as entities at the state level in United States, so the rules and regulations governing them differ quite a bit, based on the state in question.
What this means is that a Texas LLC for example will not operate under the same rules and regulations as an LLC registered in New York. Also, an LLC in Texas can have the same name as another company that is registered in a different state, but it's not advisable given how difficult it could become in the future while filing for patents.
To know more about such quirks and step-by-step instructions on how to start an LLC in Texas, visit howtostartanllc.com, and you could get started with the online process immediately. The information and services on the website are not just limited to Texas LLC organizations either, but they have a dedicated page for guiding fresh entrepreneurs through the corporate tax structures in every state.
Sole Proprietorship: Default for Freelancers and Consultants
There is only one owner or head in a sole proprietorship, and that's what makes it ideal for one-man businesses that deal with freelance work and consulting services. Single man sole proprietorships are automatic in nature, therefore, registration with the state is unnecessary.
Sole proprietorships are also suited to a degree for singular teams such as a small construction crew, a group of handymen, or even miniature establishments in retail. Also, this puts the owner's personal financial status at jeopardy.
Due to the fact that a sole proprietorship entity puts all responsibilities for paying taxes and returning loans, it directly jeopardizes the sole proprietor's personal belongings in case of a lawsuit, or even after a failed loan repayment.
This is the main reason why even the most miniature establishments find LLCs to be a better option, but this is not the only reason either. Sole proprietors also find it hard to start their business credit or even get significant business loans.
General Partnership: Equal Responsibilities
The only significant difference between a General Partnership and a Sole Proprietorship is the fact that two or more owners share responsibilities and liabilities equally in a General Partnership, as opposed to there being only one responsible and liable party in the latter. Other than that, they more or less share the same pros and cons.
Registration with the state is not necessary in most cases, and although it still puts the finances of the business owners at risk here, the partnership divides the liability, making it a slightly better option than sole proprietorship for small teams of skilled workers or even small restaurants and such.
Limited Partnership: Active and Investing Partners
A Limited Partnership (LP) has to be registered with a state and whether it has just two or more partners, there are two different types of partners in all LP establishments.
The active partner or the general partner is the one who is responsible and liable for operating the business in its entirety. The silent or investing partner, on the other hand, is the one who invests funds or other resources into the organization. The latter has very limited liability or control over the company's operations.
It's a perfect way for investors to put their money into a sector that they are personally not experienced with, but have access to people who do. From the perspective of the general partners, they have similar responsibilities and liabilities to those in a general partnership.
It's the default strategy for startups to find funding and as long as the idea is sound, it has made way for multiple successful entrepreneurial ventures in the recent past. However, personal liability still looms as a dangerous prospect for the active partners to consider.
Limited Liability Company and Professional LLC
Small businesses have no better entity structure to follow than the LLC, given that it takes multiple good ideas from various corporate structures, virtually eliminating most cons that are inherent to them. Any and all small businesses that are in a position to or are in requirement of signing up with their respective state, usually choose an LLC entity because of the following reasons:
- It removes the dangerous aspect of personal liability if the business falls in debt or is sued for reparations
- The state offers the choice of choosing between corporation and partnership tax slabs
- The limited legalities and paperwork make it suited for small businesses
While more expensive than a general partnership or a sole proprietorship, a professional LLC is going to be a much safer choice for freelancers and consultants, especially if it involves risk of any kind. This makes it ideal for even single man businesses such a physician's practice or the consultancy services of an accountant.
B, C and S-Corporation
By definition, all corporation entities share most of the same attributes and as the term suggests, they're more suited for larger or at least medium sized businesses in any sector. The differences between the three are vast once you delve into the tax structures which govern each entity.
However, the basic differences can be observed by simply taking a look at each of their definitive descriptions, as stated below.
C-Corporation – This is the default corporate entity for large or medium-large businesses, complete with a board of directors, a CEO/CEOs, other executive officers and shareholders.
The shareholders or owners are not liable for debts or legal dispute settlements in a C-Corporation, and they may qualify for lower tax slabs than is possible in any other corporate structure. On becoming big enough, they also have the option to become a publicly traded company, which is ideal for generating growth investments.
B- Corporation – the same rules apply as a C-Corporation, but due to their registered and certified commitment to social and environmental standards maintenance, B-Corporations will have a more lenient tax structure to deal with.
S-Corporation – Almost identical to a C-Corporation, the difference is in scale, as S-Corporations are only meant for small businesses, general partnerships and even sole proprietors. The main difference here is that due to the creation of a pass-through entity, aka a S-Corporation, the owner/owners do not have liability for business debt and legal disputes. They also are not taxed on the corporate slab.
Cooperative: Limited Application
A cooperation structure in most cases is a voluntary partnership of limited responsibilities that binds people in mutual interest - it is an inefficient structure due to the voluntary nature of its legal bindings, which often makes it unsuitable for traditional business operations. Nevertheless, the limited liability clause exempts all members of a cooperative from having personal liability for paying debts and settling claims.
This should clear up most of the confusion surrounding the core concepts and their suitability. In case you are wondering why the Professional Corporation structure wasn't mentioned, then that's because it has very limited applications. Meant for self-employed, skilled professionals or small organizations founded by them, they have less appeal now in comparison to an LLC or an S-Corporation.