Expert: Allen - 10/8/2010

Question
I did some contracting work in the 80's.  Self employed, sole proprietor.  I set up and contributed to a Keogh (Fidelity).  Have not contributed to it since. Still open.

Keogh is - Defined Contribution Plan -  Profit-sharing plan for the benefit of "me".

In 1996 I incorporated a business (S corp).  The corporation has one employee, me.   I want to start a 401K  now for my corporation to contribute profit sharing and deferred salary to it.

Question is what to do with the old Keogh.  What are my options?

Can I rollover the funds in the old unused Keogh to an existing IRA  (I have individual Roth and Traditional IRA's);  set up the corporation 401K (only myself involved) and roll the old Keogh to it; or just leave the Keogh as is?

I am 59.  Still working for my corporation.  Will likely never be a sole proprietor again.


Answer
The answer to your question is all of the above. There is no best answer. It all depends on whether you want to have one pool of assets to invest or two separate pools. Also, if you expect to be in a higher tax bracket when you ultimately withdraw the money, it may pay to roll to a Roth IRA. If you think you'll be in a lower tax bracket down the road, the Roth does not make sense. In any event, I would not leave the Keogh as a free standing plan. I don't see any advantage to this.

There is one additional option. Rather than starting a new plan for the S corp, you can amend the old plan to provide that there is a new sponsor - the S corp which is the successor to the sole proprietorship. However, in order to do this the Fidelity document would have to allow for this type of amendment - check with Fidelity if you want to do this.

Some other things to be aware of:
1. Since you never formally terminated the Keogh plan, it had to have been amended periodically to include language required by changes in the law and new IRS regulations. Fidelity may have sent you the papers for these amendments.
2. It would have been necessary for you to file Form 5500 with the government each year prior to 2007 if the assets of the Keogh plan exceeded $100,000 and after 2006 if the asets exceeded $250,000. If  you decide to terminate the old plan and roll the assets to the new plan (rather than amending the plan to change the entity maintaining the plan) or an IRA, it will be necessary to file a final 5500 in the year the assets are rolled (even if the assets are less than $250,000)
3. With an S corp, contributions can only be made based on actual salary paid which is subject to FICA and Medicare tax. You can not contribute on money that is treated as a dividend or distributed or undistributed profits.