No matter the reason for leaving a company, you need to decide what to do with your employer-sponsored retirement plan within 60 days of leaving. If you miss this deadline, you risk the plan being automatically distributed to you or moved to another retirement account. You have several options for your 401(k) plan, and we’ll go over them below.
Keep the Money Where It Is
First, your company should be clear about whether you can keep the funds where they currently are—in your former employer’s plan. Some employers approve this if you have at least a $5,000 balance. You might choose this option simply because you are familiar with the investment options, or because the fees are lower than your new employer’s plan.
Choose a Plan-to-Plan Rollover Option
Many employers offer a plan-to-plan rollover into their 401(k) or other qualified retirement plans. This move doesn’t acquire any tax consequences or penalties. As long as you like the investment options in the new plan, this rollover option can be an obvious choice to keep your savings momentum.
Keep in mind that if you move the money as a withdrawal from the old plan and deposit it to a new plan, rather than choosing the rollover option, your employer may withhold 20% of the sum for taxes. It is your responsibility to report this amount on your taxes for the year the distribution was made.
Roll the Money Over Into an IRA
A direct rollover into an IRA does not incur tax consequences or penalties, and there is an abundance of investment options to choose from—including stocks, bonds, mutual funds, and ETFs. If you typically move jobs intermittently, moving the money into a rollover IRA might be a good option. This way all of your 401(k)s and retirement plans can have one home.
One drawback to this option is that you will no longer be making automatic contributions, so that might curb your savings drive. However, rollover IRAs are commonly flexible, so moving your assets into a future employer’s plan might be an option.
Use the Money
Using the money for personal expenses is an option by taking a lump-sum distribution, but it will cost you. You will owe income taxes on it, and for workers under age 59 ½, you will likely pay a further 10% penalty. Depending on your tax bracket and state and local taxes, you could lose a significant amount of your retirement stash.
Employer Distribution
If your 401(k) balance is less than $1,000, your employer could release the funds via a lump-sum distribution, whether or not you requested it. If this happens and you are within 60 days of terminating your old plan, immediately roll the money into a new employer’s plan or a rollover IRA.
If your balance is more than $1,000 but less than $5,000, your plan administrator is required to move the funds into an IRA unless you specifically request another type of distribution.
In general, according to the Internal Revenue Service (IRS), if your savings is less than $5,000, your employer is permitted to distribute the funds from the plan without your authorization. You should be able to claim on your tax return any taxes or penalties your previous employer triggered when the distribution was made, but it might help to discuss this situation with a tax professional before you file.
A positive cash flow—when more cash is flowing into your business than out of your business—is a sign of financial wellness and efficient management. It is a vital piece of the puzzle to sustaining long-term growth. Read on for some strategies to help maintain a positive cash-flow.
Plan Ahead
Implement a cash flow projection. This is a basic spreadsheet that you can use as a general guide for forecasting cash flow. It will help to realistically estimate when money will be coming into the business, when it will be going out, and what you’ll have remaining once expenses are accounted for and income is recorded. The key word, however, is estimate. While it isn’t meant to be a precise projection, it should help you anticipate your cash flow for the coming months.
Knowing ahead of time if a cash shortfall is in the forecast will allow you to perhaps negotiate upcoming payment dates or even obtain a loan before that deficit is realized.
On the other hand, if a surplus is projected, take the opportunity to set funds aside for future deficit periods. A projected surplus might also be the right time to invest in the following:
Employees: If retaining knowledgeable and valuable employees means offering raises or bonuses, the investment is worth it. The expense would likely be less than hiring new staff, not to mention the time investment of training new employees.
Technology: Look for ways you can automate and simplify processes with technology. Depending on your business, this could mean establishing a remote-work infrastructure, focusing on higher-value business goals, or promoting efficiency through operational changes.
New opportunities. You can’t predict when unexpected opportunities and prospects for growth will come along, so take advantage of these opportunities when you’re in the position to do so.
Invest in Accounting Skills
In order to stay current on the status of your cash flow, basic accounting skills are non-negotiable. If payables and receivables, inventory, debt, and cost-and-profit aren’t your forte, be willing to take a course in business accounting or find a way to implement hiring an accountant into your budget.
Keep Track of Cash Flow Daily
Sales and revenue may command your interest and attention, but daily cash monitoring will help you avoid unpleasant surprises. Use your cash flow projection to know your projected cash flow for the next 30 to 60 days. Daily check-ins will allow you to catch any downwards trends and take action. Follow up on overdue invoices, scale back on any non-essential purchases, and make any needed adjustments to get your cash flow moving in an upward trend.
Boost Receivables
A solid (and probably obvious) strategy to increase cash flow is to increase sales with established and new customers, but business growth takes time. In the short term, try these methods to incentivize clients to pay sooner:
Generate and send out invoices as soon as possible
Offer discounts for quick payment
Follow up with customers who tend to stall payment
Continually Aim for a Healthy Cash Flow
Managing a positive cash flow prepares your business to adapt to changing market conditions, fluctuating economies, and periods of growth as well as stagnant seasons without needing to rely on loans and investors. Once your investments are consistently heading in the right direction, a positive cash flow should gain momentum and spur a rhythm of sustained company growth.
The IRS uses a computer program called the Discriminant Function System (DIF) to analyze tax returns and red flag them if they deviate from statistical averages. When a return draws a high DIF score, an agent evaluates it and decides if an audit is necessary. Your business should always be prepared for an audit, and that includes avoid these audit triggers when filing your small business taxes.
Higher Than Average Income
If you report a high amount of income, this may draw red flags for the IRS. Approximately 50% of the returns audited belong to taxpayers earning more than one million dollars per year. For taxpayers who earn more than $5 million, their odds of being audited more than doubles those of taxpayers who earn less.
Underreporting Cash Transactions
Don’t make the mistake of thinking that the IRS has no way to trace cash transactions. Credit card processors submit 1099-K forms to the IRS, which include a report of the total credit card transactions your business processed for the year. The IRS then applies these figures to an undisclosed formula in order to calculate the amount a business should have generated in cash sales. Therefore, if your reported cash sales reflect a lower figure than their formula detects, your business could be at risk for an audit. It’s a smart idea to keep detailed records of both cash and credit card transactions so you can support your claims should your business be audited.
Taking Too Many Deductions
Deductions are important to a small business owner, but claiming too many can raise red flags. Higher than average meal expenses and claiming your car as 100% business can set off alarm bells for the IRS and trigger and audit.
The IRS states that a legitimate business expense must be both ordinary and necessary to qualify as a deduction.
Ordinary expenses = common and accepted in your trade or business
Necessary expenses = helpful and appropriate for your trade or business. Note that an expense does not need to be indispensable to qualify as necessary.
Claiming Consistent Business Losses
Given the primary purpose of a business is to generate money, reporting losses year after year can lead the IRS to question the legitimacy of your business. If your business gets audited and you claimed losses, be prepared with documentation to demonstrate your business’ earnings and expenses throughout the year.
Be Prepared for an Audit
Your business may never need to go through an audit process, but you should manage your business always knowing that it’s possible. Keep precise records, make sure the numbers on your tax return are accurate and honest, report all income, and take suitable deductions. Lastly, consult with an accountant to be sure the totality of your revenue, expenses, and documents are free of missteps or miscalculations.
The Paycheck Protection Program (PPP) was created in 2020 by the CARES Act to help small businesses withstand the economic fallout from the COVID-19 pandemic. The recently passed PPP Extension Act of 2021 extends the deadline for PPP applications from March 31 to May 31. This move also grants the Small Business Administration an additional 30 days beyond May 31 to process loans. Here’s what small businesses need to know.
New Deadline Provides Breathing Room
According to the National Federation of Independent Business (NFIB), nearly one in every six small business owners reported the likelihood of needing to close their doors forever if current economic conditions did not improve within six months. The extension to May 31 will benefit these businesses, as well as lenders and businesses that have experienced errors and delays from technical difficulties in the application process. The SBA has also increased security in order to detect fraud, which has delayed processing in some cases. It’s important to note that May 31 is Memorial Day, so borrowers should have their applications in by May 28, before the start of the long weekend.
Opportunities for New First Draw PPP Loan Borrowers
The additional time may also benefit small businesses that received their first PPP loan this year. Because typically eight weeks must pass between the loans in order to spend money on payroll, this may give businesses enough time to use up those funds and apply to a Second Draw PPP Loan. Keep in mind that in order for a small business to qualify for a second draw loan, additional criterion must be met, according to the SBA:
no more than 300 employees
must be able to show at least a 24% reduction in gross receipts between comparable quarters in 2019 and 2020
The PPP Extension Act does not provide for further funding of the PPP. At the time of signing, however, the SBA said there was about $80 billion in funding that had yet to be disbursed to small businesses.
The pandemic lockdowns led to many professional service firms closing doors and, wherever possible, moving staff to home offices in anticipation of a temporary mode of operation. One year later, however, health safety concerns and economic uncertainty are still prevalent, prompting firms to think about a “new normal” post-COVID-19. This article covers some important points to consider as the economy begins to recover.
Cash Flow and Liquidity
If the past year has proven anything, it’s that fiscal resilience is imperative, and that likely isn’t changing anytime soon. Preserve cash, review capital investments, and cuts costs where possible.
Things to consider when thinking about cash flow:
Assess works in progress and make any necessary changes or improvements in the areas of management and billing.
Review and improve upon, if necessary, your accounts receivable system
Analyze upcoming projects with a keen eye to scaling back on staffing, keeping in mind the risk of potentially losing key workers and talent.
With social distancing guidelines in mind (and not knowing what the future looks like in regards to this), aim to reduce costs by reassessing real estate needs, existing office space, and places where you might be able to consolidate. This is especially important if some or all of your staff will be switching to permanent remote work model.
Things to consider when thinking about liquidity:
Work out an agreement with leases. If your firm is in a financial position to remain in your current space, think about negotiating your lease renewal early and possibly extending it. Depending on circumstances and the current state of your space, you could approach discussions by offering free or reduced rent in exchange for tenant improvements.
Review your lease for tenant improvements. If your lease provides an allowance for tenant improvements, it may be possible to negotiate the elimination of that allowance in exchange for the cash value or rent credit.
Rent relief may be an option. Typically handled on a case-by-case basis, financial statements may be required to determine need.
New Opportunities and Growth
If your firm is in the position to be able to jump on new opportunities as they become available, don’t delay. Once your cash flow, liquidity, integrated technologies, and business processes are in good standing, develop a game plan for organic growth and expansion into new areas, including acquisition. Be mindful of how the increased demand that comes with growth can potentially burden each department, and have a plan in place to deal with the increased demand.
You’ve likely had to lay off or furlough valuable workers over the last year. If staffing shortage has prevented you from exploring new ideas and establishing new business practices, check the state of your cash flow and liquidity to see if now might be the time to expand your organization’s talent and expertise.
IT and Communication
With a year of pandemic life behind us, you probably have a good idea of how to move your firm forward in the future. If a remote working model has worked for all or part of your staff, you might decide to make it permanent. Be sure that your IT and cybersecurity infrastructure are up to date. Also evaluate methods of communication so that staff can easily and securely communicate with clients and each other.
Whether or not you foresee changes brought on by the pandemic as affecting lasting change to your business, one thing remains true: the key to success and growth is knowing the specifics and statistics of your organization in order to make wise decisions that will optimize business outcomes.
