SEP-IRA or solo 401(k) with a slight twist

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SEP-IRA or solo 401(k) with a slight twist

Postby K-Bogle » Fri Apr 05, 2013 1:38 pm

In 2012 I created a solo 401(k) with TD Ameritrade. I have not funded this account yet but based on my 2012 earnings, I can fund it with the max contribution. But I've had some issues with TD and my plan is to create a solo 401(k) with Fidelity for future contributions. My 2012 earnings also qualify me for a max contribution to the SEP IRA.

Since I want to move my money out of TD and into Fidelity anyway, can I:

1) create a SEP-IRA with Fidelity (this takes seconds)
2) fund the SEP-IRA with 2012 contribution before the tax deadline
3) establish a solo 401(k) with Fidelity
4) roll over my Fidelity SEP-IRA into my Fidelity solo 401(k)

All while not affecting my ability to make pre-tax 2013 contributions to my new Fidelity solo 401(k)? This would also clear my SEP-IRA and I presume allow me to Roth convert my 2012/2013 TIRA contributions without disrupting my tax-deferred money.

I'm only assuming this is optimal because my income qualifies me for the max 2012 contribution into either type of account and then I can bypass any hassles of rolling from TD to Fidelity.

Thanks!
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby roymeo » Fri Apr 05, 2013 2:31 pm

Double-check that you can put money into a SEP or solo 401(k) for 2012 after 12/31/2012.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby TS1 » Fri Apr 05, 2013 2:48 pm

http://www.irs.gov/Retirement-Plans/Ret ... tributions

When must I deposit the contributions into the SEP-IRAs?

You must deposit contributions for a year by the due date (including extensions) for filing your federal income tax return for the year. If you obtain an extension for filing your tax return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return.

If you did not request an extension to file your tax return and did not deposit the SEP plan contributions by the filing due date for that return, you are not allowed to deduct any SEP plan contributions on that year’s return. The contributions may be deducted on the following year’s return.

If you improperly deducted SEP plan contributions on your return, you must file an amended tax return as soon as possible.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby K-Bogle » Fri Apr 05, 2013 6:06 pm

Yes it appears I can both open and fund a SEP-IRA any time before the tax deadline. A solo 401(k) needs to be opened during the tax year but can be funded any time before the tax deadline.

I just wanted to make sure that there are no holes in my logic.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby K-Bogle » Sun Apr 07, 2013 11:21 am

Hey guys, just wanted to bring this to the top for one more attempt at an answer before proceeding.

The question is whether or not I can:

1) create a SEP-IRA with Fidelity (this takes seconds)
2) fund the SEP-IRA with my 2012 contribution before the tax deadline
3) establish a solo 401(k) with Fidelity
4) roll over my Fidelity SEP-IRA into my Fidelity solo 401(k)
5) still make new pre-tax 2013 contributions to that new solo 401(k)

This seems like a logical choice for anyone that didn't create their solo 401(k) by the end of the year and still wanted to make contributions for 2012. It seems like it would work particularly well for someone who qualifies to make the max contribution to either plan.

I've asked the only tax professional I know and unfortunately the knowledge just wasn't there. Fidelity confirmed I can make the rollover.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby tfb » Sun Apr 07, 2013 12:27 pm

Yes you can. If you also made a Roth conversion in 2012, adding a balance to SEP-IRA for 2012 may affect it. If that doesn't apply to you, then don't worry.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby JamesSFO » Sun Apr 07, 2013 12:42 pm

I believe the plan must be in existence prior to the end of the calendar year so double check that with Fidelity. Specifically, I don't think your newly opened SEP-IRA will take a 2012 contribution. Language for SEP-IRA's quoted above is about CONTRIBUTION timing.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby mah001 » Sun Apr 07, 2013 1:03 pm

Yes you can achieve the 5 items.

Note the ameritrade 401k would not be a bonafide plan in IRS's view, and that's ok. That means you have no need to terminate it, including filing a final 5500, executing amendments, etc. An alternative would have been to 'restate' the ameritade 401k using the fidelity document, thus continuing the old plan instead of creating a new one. (Refer to options given when adopting a plan.). But again, a plan never funded never existed, so it's cleaner to ignore the old plan. You could even indicate the fidelity plan as 001 instead of 002.

The sep plan from fidelity might resemble irs form 5305 language in that it might preclude 'the current maintaining of another plan like a 401k.' Such language is not a problem, regardless of when you roll the sep out of existence. As long as you're not CONTRIBUTING to both plans for the same tax year, the clause is a nonissue.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby K-Bogle » Sun Apr 07, 2013 2:55 pm

Thanks guys, I appreciate the help.

Just discovered one potential pitfall this afternoon. My income is split down the middle between distributions from a partnership (taxed as a partnership, files 1065) and pure self-employment income. It appears that the partnership income would not qualify for the SEP contribution % since partners are considered employees. Need to make sure the self-employment income is enough to qualify for the max SEP contribution, otherwise I'll have to make the 2012 contribution to the previously established solo 401(k) with TD.

James, it appears you can make 2012 contributions to a SEP IRA created before the 2012 tax deadline. From irs.gov:

http://www.irs.gov/Retirement-Plans/Ret ... lish-a-SEP

Is there a deadline to set up a SEP?

You can set up a SEP plan for a year as late as the due date (including extensions) of your business’s income tax return for that year.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby JamesSFO » Sun Apr 07, 2013 5:19 pm

K-Bogle wrote:James, it appears you can make 2012 contributions to a SEP IRA created before the 2012 tax deadline. From irs.gov:

http://www.irs.gov/Retirement-Plans/Ret ... lish-a-SEP

Is there a deadline to set up a SEP?

You can set up a SEP plan for a year as late as the due date (including extensions) of your business’s income tax return for that year.


Excellent, the original quoted materials were specific to contributions...
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby mah001 » Sun Apr 07, 2013 8:27 pm

K.B., are you saying p'ship might not count because there are other partners who'd need to get a contribution?

If the p'ship business and the 'pure self employment business' are in a controlled group or affiliated service group relationship with each other, then the SEP would be required to consider earnings and employees of both businesses.
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Re: SEP-IRA or solo 401(k) with a slight twist

Postby K-Bogle » Mon Apr 08, 2013 11:50 am

mah001 wrote:K.B., are you saying p'ship might not count because there are other partners who'd need to get a contribution?

If the p'ship business and the 'pure self employment business' are in a controlled group or affiliated service group relationship with each other, then the SEP would be required to consider earnings and employees of both businesses.


Yes, I'm saying the p'ship may not count for that reason. There's no SEP in place and the partners have no desire to do this.

------------------------------

UPDATE: Ok I did more research on this and discovered the following:
1) Definitely not an affiliated service group since there are no business dealings whatsoever between the sole-prop and the partnership.
2) In order for it to be a controlled group, I would need to own at least 80% of the partnership, and I do not. As a matter of fact, my ownership is less than 50%.

I used the calculations found starting on page 14 of: http://www.erisa-lawyers.com/documents/Chapter11.pdf
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