As you know, wherever you house your 401(k), you most likely are wanting checkbook control of the plan’s funds as Trustee of the plan. You already have that, but is there a different approach that may be more attractive to you? Maybe having a separate “checkbook” for each participant account (e.g., Roth, Pre-Tax Elective Deferral Accounts)? Is there a reason why you couldn’t or shouldn’t have a checkbook for each contributory account for your 401(k)? To explain the potential benefits associated with possibly having more than one checking account for the plan, let’s review your current limitations:
You currently have 1 checkbook for your plan. Is this bad….of course not. There can be very good reasons for having one central checkbook, but is there possibly another, better way to “skin the cat?” Most of you have heard me say the following:
1) “You need to move funds into the master account in order to get checks for the plan.” (let’s be honest, that’s always been a hassle)
2) “When you are wanting to take funds from a participant account (e.g., rollover account, pre-tax elective deferral account), you will need to move the money to the “master” account to write the check for the investment from the plan.”
Again, if you want one checkbook, no issue at all. But, might there be a more user-friendly way to write checks and account for the transactions of the plan? What if you could write a check from any participant account within the 401(k)? What if this might also assist you in your accounting for an investment?
For example, let’s say that “Jim” is a sole proprietor and currently has $100,000 in a rollover account, $50,000 in a business profit sharing account, and $50,000 in a pre-tax elective deferral account. Now, let’s assume that Jim wants to make a $100,000 investment using funds from his rollover account. Well, he has to move funds from the rollover account to the master account to write the check. Now, let’s say that the plan wants to make that same investment with $50,000 from the rollover account and $50,000 from the pre-tax deferral account. You got it, Jim moves funds from each account to the master and writes the check.
Is this a problem…no…BUT…
What if you could write a check directly from any participant account in the plan? For example, if you are wanting your Roth elective deferral account to make an investment, is there a reason why you couldn’t write the check directly out of the Roth account itself? Might that be easier than moving funds into the master account and then writing the check? Would it seem to make sense that accounting for that investment may be simpler when you are writing the check directly out of that account with all returns, profits, etc. going directly right back into that same account?
Bottom line: you want to keep different types of contributions (i.e., rollover, pre-tax deferrals, Roth deferrals (which under law must be kept in a separate account), profit sharing and after-tax contributions) in separate, same-named accounts, within the plan. In doing that, having a separate checking account for each type of account may make sense for the plan and its accounting responsibilities.
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. Always consult with your respective professional in all such matters.