Taking Charge of Your 401(k) Investments

These days financial services firm, Lamaute Capital Inc. (InvestSafe.com), is seeing a lot more investors worried about their retirement and the miserly growth of their 401(k) investments. A typical comment we get, says Daniel Lamaute, head of the firm, goes something like this:

"When I left my job, four years ago there was $75,000 in my 401(k). I then rolled over to an IRA, now I still have $75,000. I would like to open a self-employed 401(k), move my rollover IRA to the new account and borrow from it to invest in my business."

Whether you want to tap your 401(k) to invest in your business, buy a vacation home, or get rid of your high-interest debt, these are the qualifications and steps needed to get a loan from a Self-employed 401(k).

You must have a business in order to open a Self-employed 401(k) or Solo 401(k). It does not matter if you just started your business or even that you work full time job in addition to your business. As long as your business has no employees, or your spouse is your only employee, than most likely you can establish a Solo-401(k) plan.

The Solo 401(k) is available to any business including C corporations, S corporations, partnerships, and sole proprietors working part-time or full-time in their business. This includes independent contractors and freelancers with 1099 income. A Solo 401(k) is not for you, however, if you have employees who work more than 1,000 hours per year, or if you plan to hire employees in the next year or two.

Once you have set up your Solo 401(k) there is no limit on how much you can transfer/rollover tax-free from your other retirement plans or IRAs into your Solo 401(k). In general, only pretax contributions can be rolled over into a Solo 401(k). You have to quit your job before you can rollover your current employer's 401(k) to your own Solo 401(k).

As soon as 15 days after the funds are in your Solo 401(k) you can borrow up to a maximum of $50,000, but in no case more than 50 percent of the balance that is in your Solo 401(k) account.

A loan from a Solo 401(k) is easy to obtain because you are in effect taking money out of your account. In many cases the interest rate is fixed at prime rate for the five year term of the loan. The loan payments, interest and principal, go back in your 401(k) account.

You can use your 401(k) loan for any purpose. By taking a loan instead of a distribution you can avoid the tax penalties generally associated with early withdrawals. However, if the loan is not paid back on schedule, the balance in default will be subject to taxes and a possible 10% early withdrawal tax penalty.

When investing for retirement it is wise to hold a diversified portfolio and to manage your investments for the long haul. Some small business owners see taking a loan from their 401(k) as a method to diversify their portfolio beyond what is available to them in their 401(k). But before rushing to take a loan from your 401(k) to start a business, beware that roughly half of all new businesses fail within their first five years of existence.

For more information about the Self-employed 401(k) visit: www.InvestSafe.com

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Daniel Lamaute of Lamaute Capital, Inc.,

Lamaute Capital (www.investsafe.com) specializes in retirement plans and methods to minimize tax penalties on early withdrawals. Tax laws and regulations are complex and subject to change. Lamaute Capital does not provide tax advice. Please consult an attorney or tax advisor about your particular situation.