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You are here: Experts > People/Relationships > Retirement Planning > Retirement Planning > Conveting MPP to 401(k)
Expert: Willard R. Brumbaugh, LUTCF - 10/29/2009
Question
QUESTION: Are there any tax penalties for converting from an Money Pension Purchase to a 401(k) for an S corp with (1) employee?
ANSWER: Dear Tracie,
Can you give me more information? What do you mean by Money Pension Purchase? What is your motivation for having a 401(k) plan? How old is this employee? Is the employee also the owner? What is in the MPP? And how much is intended to be put in the 401(k)?
Finally, will this company ever have more than the one employee?
Willard R. Brumbaugh, LUTCF
---------- FOLLOW-UP ----------
QUESTION: The company agreed to contribute $6000 per year for the employee into a pension account. There is also a profit shring compnenet but that has rarely been used. The empoyee is 55. Yes the empoyee is the owner and no there will never be more than (1) employee.
Answer
Dear Tracie,
It appears that you may have been asking the wrong questions. If you mean a Money Purchase Plan, that is the same in function as a 401(k). The alternatives would have been a Defined Benefit Plan or a Profit Sharing Plan. Only the Profit Sharing Plan would have gotten my support.
Since the employee is over the age of 50, $6,000 is the amount that can be put in an IRA. This is the direction that one should go if there is a desire to not have to include anyone else.
Unless this owner-employee is in the highest tax bracket, I suggest that a Roth IRA be considered. After five years and reaching age 59 1/2 distributions would be tax-free. This is usually better than postponing the taxes.
Monies that have been accumulated in the soon-to-be replaced program should be rolled into a "pour-over" IRA. This may not be possible in 2009, if annual income is too high; but the rules change in 2010.
Willard R. Brumbaugh, LUTCF
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