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I am a business owner and would like to open a 401(k). Is there a date or deadline during the year that I cannot open a new 401(k)?

I am not asking if it is a good idea, I have already determined it makes sense for my savings and to retain employees. However, I am waiting for a couple of things to fall into place over the summer to open my 401(k). If I wait to open it on September 1, October 1, or later, are there any laws preventing me from doing that? Thanks in advance.

May 02, 2013 by Will from Denver, CO in  |  Flag
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Peter C. Karp Level 20


Congratulations on making the decision to establish a 401(k) plan for your company and its employees. In addition to savings for yourself and your employees you may also be eligible to claim tax credits for some of the costs to set up the plan. These credits can typically be used to offset up to 50% of plan start up costs up to $500/year for the first 3 years. Qualified costs include those necessary to establish the plan, administer and educate employees about the new plan. In our experience, there are not any specific laws as to the date you establish the plan however the IRS has more favorable views on plans established at least 90 days before year end as that allows participants an opportunity to contribute during the current year.

Since there are several factors to consider regarding the type of 401(k) plan that may best suit your needs, it is important to work with an experienced retirement plan advisor to determine the best structure and recordkeeping platform that is cost efficient and provides a diversified investment menu. If you need additional guidance please contact us at 415-345-8185 or email peter@karpcapital.com. Our website provides information on various types of plans here http://www.karpcapital.com/services-businesses.htm .

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  May 09, 2013 from San Francisco, CA

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Hi Will,

You can work on opening a 401(k) for your business up until October 1st for the present year - so in other words, you have until that time to get your 401(k) up and running for 2013 - and still make contributions to be credited for tax year 2013. Plans that are established after that can only accept contributions for the following year - for 2014.

It takes a while to evaluate all of the options and to put the plan in place, so I would get started now. You do not have to make (or even commit to) any contributions until later - once all those pieces fall into place, you know your cash flows, and you've had time to consult with your CPA.

The deadline for actually making contributions is the last pay period of the year for EMPLOYEE contributions (known as elective deferrals). But you have until your tax filing deadline - plus extensions - to make EMPLOYER matching contributions. This is because sometimes there are quite a few calculations involved to determine how much the owner and other higher-paid people in the company can put away, based upon the participation of the employees.

So... I'd get the plan set up NOW - evaluating which plan is the best, and what features you want to have. Take some time with it because you have to live with it. Then wait until all those "pieces" fall into place to actually start making contributions.

Jon Castle http://www.wealthguards.com

Comment   |  Flag   |  May 02, 2013 from Jacksonville, FL

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The October 1 deadline is typically for Safe Harbor Match. We allow later than that for Nonelective SH Plans. This is because the Non Highly Compensated employees or 'NHCEs' are still receiving a benefit from the plan regardless of if they defer or not.

For a non-Safe Harbor plan, the deadline is 12/31 to be set up. Your plan provider or TPA may have a cut-off of 12/1 or even earlier to set up a current year plan; it is their busy time.

Do your shopping early. there is no shortage of advisors that would want to spend some quality time with you.

Comment   |  Flag   |  May 07, 2013 from Delray Beach, FL

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