What To Do With Your 401(k) When You Go Self-Employed

Entrepreneurialism

Jul 29

1 in 5 U.S. workers have left behind or forgotten 401(k) retirement accounts with their former employers, according to estimates by financial services company Capitalize.

A nearly 60% increase compared with 2020.

Many of these employees have gone on to start their own businesses, receiving no cue from a new employer to roll their 401(k)s into new accounts.

If you’re one of them — or forgot about your old 401(k) until this story reminded you ;) — you’ll want to roll your 401(k) into your own account.

It’s easier than it sounds, especially if you work with some type of financial advisor.

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Account Options

You have two account options:
Solo 401(k)
SEP IRA

There are some limitations to both.

Only solopreneurs can open a Solo 401(k), meaning you can’t have employees.

You can have a simplified employee pension plan, or SEP IRA, whether you have employees or not, but it requires you to contribute the same percentage to you and your employees’ accounts.

Here are some of the differences between the accounts.

Both work like a Traditional IRA in that your contributions are tax-deductible now and the distributions are taxed when you make withdrawals later on in retirement.

Be sure to chat with your certified public accountant to choose the right account type for your business.

You can also have a Roth IRA in addition to either a Solo 401(k) or a SEP IRA. A Roth works in the opposite way in that you contribute post tax earnings to your account and your distributions are not taxed later.

Invest these funds wisely

Once you’ve selected your account type, you’ll need to find a bank or investment company to open an account with.

And make sure to invest this money based on your age and the amount of risk you’re willing to take.

I opened my Roth IRA at age 18 with my local bank and it accrued just 2% interest for seven years until I shifted it to a wealth management company.

Now my Roth IRA and SEP IRAs are invested in mutual funds with a significantly higher rate of return. And my wealth management company handled the account transfer from my bank for me.

You don’t need to work with a wealth management company to invest your retirement accounts. Tori of Her First 100k and Vivian of Your Rich BFF share excellent tips on self-investing. They’ve each written books that I also highly recommend.

Sticking it in an account without selecting an investment strategy means it will earn pitiful interest and not be able to support you in your golden years.

How to make contributions

Your employer made this easy. They would deduct your 401(k) contribution from your paycheck and send it to your account for you.

When you own a business, the easiest way is to set-up an auto transfer from your business bank account to your Solo 401(k) or SEP IRA. My contribution transfers happen weekly.

My Roth IRA contributions are also set-up on a weekly auto transfer, but these contributions are pulled from my personal account because it contains post income tax dollars. (Remember the tax incentive for a Roth is the opposite of a 401(k) and SEP/Traditional IRA.)