401K » Retirement Plans

Before taking the risk of tapping into your 401k to launch a new business, you need to address the risks involved with the undertaking. If you use your retirement money to finance your plan and the business fails, the long term financial damage can permeate to the core. If, however, the business succeeds not only will your 401k be intact but you will experience the perks of being self employed.

The strategy of using your 401k to fund a business launch not only comes with personal liabilities but tax risks as well. The existing tax code is filled with "self-dealing" rules that if not properly adhered to could cost theentrepreneur plenty of money in the form of taxes on the existing 401k (do not forget, that money is deposited on a pre-tax basis).

The key to using your 401k as seed money for your new business is by properly creating a proper employee benefit plan for yourself. According to bothMichael Julianelle, the IRS director of employee plans, and Andrew Zuckerman, the IRS director of employee plan rulings and agreement, this can be done only if:

• The new 401k is properly established and uses all the rules and regulations of all 401k plans
• The business must be properly audited to asses its real value regularly

If you want to tap into your 401k to finance your own business you need to speak to tax specialists familiar with these strategies. By spending the time now to set up your business legally and to adhere to all the proper tax codes, you will help ensure that you are not burdened by heavy tax liabilities later on.

If the current recession is motivating you rise from the ashes much like the mythicalArabian bird known as the "Phoenix," then you may be using that pink slip as a piece of note paper on which to jot down thoughts regarding launching your own business. Starting your own business is both an exhilarating and nerve wracking experience, especially when it comes time to finding the money to start it. However, your years of working at "Company X" strictly for the benefits, will finally pay off, if you are leaving with a 401k in your name.

With layoffs sweeping many companies, including the 401(k) industry, you might be more worried about losing your job or losing the value in your 401(k) portfolio than you are about the staff of your 401(k) fund. But here's something you might not have thought of: cutbacks also affect your 401(k) fund managers, as well as the people in your own company who keep records and pick stocks and funds for your company's 401(k) to invest in. Despite bailouts of major investment brokerages, fund houses are going out of business right and left. Should you worry about your 401(k) company going broke?

First, it's important to understand that - though the value of your 401(k) stocks may plummet in the general stock market downturn - the possibility of your 401(k) plan itself going broke is, according to most experts, very unlikely. Your 401(k) plan is an entirely separate entity, legally speaking, from the company that sponsors it. What this means for you is that even if your company goes out of business, the 401(k) plan as an entity is protected.

But what if the fund house goes out of business? In that scenario, the plan assets - i.e., the money that your plan invests on your behalf - will still come back to you, including any money that his been contributed to the plan through company matching funds (subject to whatever vesting rules might apply). If a fund goes out of business, its assets are liquidated and you will get money back, even if it is less money than you originally invested. The value of the stock you get back will be market value, so if the market value is less than it was when you invested in the stock, you may lose money in that regard.

Should you pull out of your 401(k)? Experts advise against it, as 401(k) plans enjoy excellent protection under federal law, and unlike IRAs, are protected from creditors. Also, the Supreme Court recently ruled that individual plan participants may file individual lawsuits in the event of plan abuse.

The best course, experts agree, is to keep a close eye on your plan and make sure that you know where your money is going and how it is performing.

Here are a few warning signs to look out for and ways to fail-proof your 401(k) portfolio:

First, are you experiencing any delays in transferring contributions into plan investments? A delay over seven days is beyond the court-defined limit, and is a definite red flag of poor performance and poor service. If it's taking more than a couple days for your contributions to be transferred, you should complain immediately.

Second, is your 401(k) mostly invested in stock from your own company? This is a quite common scenario and it is considered unwise to put all of your investment eggs, as it were, in one basket. Experts suggest that you sell your company stock down to the very minimum allowed by the plan. Even if the price is currently depressed by the market, diversifying can only strengthen your portfolio. If your livelihood and your retirement are both tied primarily to one company, you risk losing both at the same time.

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