Gimme a "K"!
Thought that starting your company meant missing out on the pros of 401(k) retirement plans? Not anymore. There's now a 401(k) option for entrepreneurs. "Until now, small-business owners have had to rely on simplified employee pension plans (SEPs)," says Jim Thigpen, president of Atlanta-based Monarch Financial Services. "But last year they created a new 401(k) plan that allows people to put in more than they could through a SEP."
The new plan is also easy to administer and relatively inexpensive to open. While SEPs enable self-employed people to contribute just 13 percent of their income, the new 401(k)-sometimes referred to as a Uni-K-allows contributions up to 25 percent. Both plans have similar annual caps, which means that for individuals with incomes of more than $160,000, allowable contributions are equal, but Uni-K holders can borrow against their holdings, something you can't do with a SEP.
The catch? Only sole proprietors and husband-wife teams need apply. "But it's better than a SEP because you can put more in," Thigpen says, "and, while you may not plan to borrow against it, you never know."
An Investor Named IRA
If you're having trouble finding an influx of capital for your business, you may be overlooking a simple solution: your own retirement funds. Roll the funds into an IRA directed to invest them in your business. The business gets an influx of capital, and should you later cash out through an acquisition or public offering, any gains on your investment are tax-free as long as you don't withdraw them until retirement.
The hitch? Due to restrictions on how IRAs can be invested, you should plan for the IRA transaction prior to setting up your company- particularly when starting a sole proprietorship. "You name yourself and your IRA as co-owners, along with anyone else involved, at the time that you file the company papers," explains Tom Anderson, CEO of San Francisco-based Pensco Trust Co. "Because if you own more than 50 percent of a business personally, your IRA is prohibited from investing." But companies up and running can also access IRA capital-as long as the IRA holder's stake in the company is less than 50 percent.
If you've got a house, you're probably insured for hazards like accidents, fire and theft-but what about a drop in real estate prices? Homes are often people's biggest assets, which leaves a lot of folks "with way too many of their assets in one undiversified, highly leveraged position," points out Barry Nalebuff, a professor of management at Yale University (as well as co-founder with Seth Goldman of beverage company Honest Tea).
On average, real estate across the United States has slightly outperformed stocks, but regions experience drops-which can leave homeowners deeply in the red. To help guard against such a scenario, Yale teamed up with home equity products firm Real Liquidity LLC and national nonprofit Neighborhood Reinvestment to create a price protection policy.
Under the policy, homeowners pay premiums linked to the index of housing prices in their ZIP codes rather than a specific home's value, explains Tom Skinner, president of Washington, DC-based Real Liquidity, who notes that a homeowner who sells for a profit can still collect on the policy if prices in the area drop. "If you took out a policy for $100,000, you would pay a $1,500 premium; and if your local index was down 10 percent when you sold the home, you would receive a $10,000 claim," he explains.
The protection plan is currently available only through a pilot program in Syracuse, New York, but Nalebuff hopes to roll it out to additional markets this year.
Jennifer Pellet is a New York City-based freelance writer specializing in business and finance.