Retirement > 401(k)s & IRAs
IRA-SEP for self-employed
February 1, 2000: 12:52 p.m. ET

If you open your own business, an SEP plan can replace your 401(k)
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NEW YORK (CNNfn) - It's scary to think about leaving the comfort of a big company to start a business on your own. One of the biggest concerns is worrying about what you'll do for a retirement plan.
    Larry Johnson, a certified financial planner in Itasca, Ill., and a member of the Financial Planning Association, advises people in these cases to open what's called an IRA-SEP.

    Ask the expert a question about your retirement plan.

    "I am thinking about starting my own business but I'm worried about losing my company benefits. I heard about a special IRA that allows you to contribute more money than the standard $2,000 if you are self-employed. Can I open one of these? In addition, should I roll over my current 401(k)? I have about $10,000 in it."
    Benefits can be a daunting subject for someone ready to leave their present position and begin a new company.
    If you are self-employed, you can open a retirement plan that is similar to a "large IRA." It is called an IRA-SEP (Simplified Employee Pension). This allows you to contribute up to 15 percent of your net income before taxes to a retirement plan. It has a minimal amount of record keeping, and is exempt from some of the annual filing requirements of other such pension or profit sharing plans. Most financial planners can help set up an IRA-SEP so you can make that tax deductible deposit up until the date that you file your taxes for the preceding year (including extensions).
    As for rolling over your 401(k) to an IRA, there are several considerations. First is the type of investment options that are available if you keep it with your previous employer. Some employers limit your options once you move on. If you do roll it over, then you may want to consider a self-directed IRA that will allow you to purchase different types of diversified investment assets, such as mutual funds, stocks, and bonds. Again, most financial planners can help you with the establishment of such a plan.
    As far as other benefits, most states allow you to convert your company group health insurance to COBRA coverage at a slightly higher premium. This is usually available for a limited period of time (12-18 months in most states). This gives you adequate time to research alternatives
    Another option is staff leasing. There are many companies that will share the employment of you and your new employees by "co-employing" them with a larger group. This means they will pool you with a larger group and thus create economies of scale for such items as health benefits.
    They can also cover you and any employees you have for unemployment insurance and other employer responsibilities. This is all done for a fee or surcharge, but oftentimes gives the small employer access to benefits that are cost-prohibitive to create on their own. Back to top


Ask the expert: choosing funds for your 401(k) - Jan. 28, 2000


Financial Planning Association

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