is this legal/allowed? [Contribute to Solo 401k and SEP]

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is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby whitecliff » Sun Jul 14, 2013 7:42 pm

I currently have a small business and have a SEP IRA and a solo 401k. I am going to be joining another business as an employee that has no retirement program. Even though I will no longer be operating my business sometimes it takes 2-8 months for money to come in from insurance companies so it will still be producing income throughout the year and possibly into the next. Can I continue to contribute to my solo 401k and SEP even though I am an employee of a business since I am not utilizing a retirement plan through this employer? If not, is the first day I start working there the last day I can contribute to the solo 401k and SEP? Thanks a lot for the help.
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Re: is this legal/allowed?

Postby BolderBoy » Sun Jul 14, 2013 7:46 pm

whitecliff wrote:I currently have a small business and have a SEP IRA and a solo 401k. I am going to be joining another business as an employee that has no retirement program. Even though I will no longer be operating my business sometimes it takes 2-8 months for money to come in from insurance companies so it will still be producing income throughout the year and possibly into the next. Can I continue to contribute to my solo 401k and SEP even though I am an employee of a business since I am not utilizing a retirement plan through this employer? If not, is the first day I start working there the last day I can contribute to the solo 401k and SEP? Thanks a lot for the help.

What do you mean by "I currently have a small business..."? Are you a sole proprietor?
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Re: is this legal/allowed?

Postby whitecliff » Sun Jul 14, 2013 8:04 pm

BolderBoy wrote:
whitecliff wrote:I currently have a small business and have a SEP IRA and a solo 401k. I am going to be joining another business as an employee that has no retirement program. Even though I will no longer be operating my business sometimes it takes 2-8 months for money to come in from insurance companies so it will still be producing income throughout the year and possibly into the next. Can I continue to contribute to my solo 401k and SEP even though I am an employee of a business since I am not utilizing a retirement plan through this employer? If not, is the first day I start working there the last day I can contribute to the solo 401k and SEP? Thanks a lot for the help.

What do you mean by "I currently have a small business..."? Are you a sole proprietor?


Yes
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Re: is this legal/allowed?

Postby BolderBoy » Sun Jul 14, 2013 9:20 pm

whitecliff wrote:What do you mean by "I currently have a small business..."? Are you a sole proprietor?


Yes[/quote]
Then you aren't quitting being the sole proprietor of your small business, even if you work for a full-time employer. Lots of people do this.

No, you cannot use your sole proprietorship income to fund a retirement plan which your employer doesn't offer through your W-2 employment. But you can continue to contribute to your sole proprietorship retirement plan based on the income that continues to stream in there.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby LadyGeek » Sun Jul 14, 2013 9:53 pm

This thread is now in the Personal Finance (Not Investing) forum (employer retirement plans). I also retitled the thread.
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Re: is this legal/allowed?

Postby ieee488 » Mon Jul 15, 2013 8:33 am

BolderBoy wrote:
whitecliff wrote:What do you mean by "I currently have a small business..."? Are you a sole proprietor?


Yes
Then you aren't quitting being the sole proprietor of your small business, even if you work for a full-time employer. Lots of people do this.

No, you cannot use your sole proprietorship income to fund a retirement plan which your employer doesn't offer through your W-2 employment. But you can continue to contribute to your sole proprietorship retirement plan based on the income that continues to stream in there.


+1
You can only contribut to your SEP-IRA + solo 401K with income from your business.
Also, why do you have both a SEP-IRA and a solo 401K? Are you sure you are not over contributing?
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby Buysider » Mon Jul 15, 2013 8:58 am

Related question - are the SEP contributions cumulative looking across all employer retirement plans? I'm looking at taking a (part-time) job that will give me W-2 income and has a 401k plan with match (while keeping my self-employed job). I'm just about at the max on the SEP with my current business, am I still eligible for the $16.5k deferral and a match from this job in addition?
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Re: is this legal/allowed?

Postby whitecliff » Mon Jul 15, 2013 9:45 am

ieee488 wrote:You can only contribut to your SEP-IRA + solo 401K with income from your business


I understand this but was just making sure if you are a W2 employee you can still hold these two plans and contribute to them if you have another small business on the side.

ieee488 wrote: why do you have both a SEP-IRA and a solo 401K? Are you sure you are not over contributing?


I have a SEP because my first CPA out of school instructed me to open this type of plan, but as I begin to be able to contribute my max to this plan I learned (from this site) that I was missing out on the 17,500 employEE contributions. Yes I am positive I am not over contributing.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby Spirit Rider » Mon Jul 15, 2013 10:21 am

Many people have side businesses while employed as a W2 employee. There is nothing that automatically precludes you from contributing to Solo401k, SEPIRA, Traditional IRA, Roth IRA, company 401k in the same year. There are restrictions based on income and on contribution amounts.

Your employee deferral limits is shared between your Solo401k and W2 employer(s) 401k. Your employer match limit is shared between your Solo401k and SEPIRA, but not your W2 employer(s)

Your Traditional IRA contribution is limited by your income if you are eligible for any employer qualified plan, including Solo401k/SEPIRA. The total IRA contribution is shared with your Roth IRA. Your Roth IRA contribution is limited by your income. The total IRA contribution is shared with your Traditional IRA.

Given the above constraints you literally could contribute 1/2 your self-employment employer match to a SEPIRA, 1/2 your self-employment employer match to your Solo401k, 1/2 your employee deferral limit from your self-employment to your Solo401k, 1/2 employee deferral limit from your W2 employment to your company 401k, 1/2 your IRA contribution limit to a Traditional IRA, 1/2 your IRA contribution limit to a Roth IRA, all in the same year.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby Buysider » Mon Jul 15, 2013 1:20 pm

So Spirit Rider,

So I have a $51k cap in my SEP. I can contribute into a 401(k) which counts towards that 51k limit, but if I get a matching from a W-2 employer, I can theoretically exceed $51k in total contributions? Does this look right:

My SEP IRA contribution - $40k
my W-2 401(k)contribution - $11k
my 401(k) employer's match $11k

for a total of $62k?
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby EmergDoc » Mon Jul 15, 2013 6:40 pm

I've wrestled with this a great deal. Your business contributions, employer and employee, cannot exceed $51K. You must have sufficient income to do so. Your employee contributions for your W-2 job are completely separate and you can separately max those out.

I see no reason to have a SEP-IRA and a Solo 401K. Reasons to have a solo 401K include preserving the backdoor Roth option, maximizing contributions if you don't make enough to max out a SEP IRA, and desire for Roth contributions. The only advantage of a SEP is simplicity. Unfortunately, Vanguard's version of the Solo 401K doesn't allow for a SEP-IRA rollover into the plan.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby whitecliff » Mon Jul 15, 2013 7:59 pm

EmergDoc wrote:I see no reason to have a SEP-IRA and a Solo 401K


I completely agree. As I said earlier the SEP was started for me a while ago and recently opened the solo 401k. I will eventually roll the SEP into a 401k at fidelity and then roll it back into vanguard. Vanguard does not accept SEP to 401k rollovers but will accept a 401k to 401k rollovers.
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Re: is this legal/allowed?

Postby BolderBoy » Mon Jul 15, 2013 8:46 pm

whitecliff wrote:but as I begin to be able to contribute my max to this plan I learned (from this site) that I was missing out on the 17,500 employEE contributions.


Ummmm, are you talking about the salary deferral amount? That is available to both 401k and SEP-IRA plans.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby whitecliff » Mon Jul 15, 2013 10:29 pm

BolderBoy wrote:
whitecliff wrote:but as I begin to be able to contribute my max to this plan I learned (from this site) that I was missing out on the 17,500 employEE contributions.


Ummmm, are you talking about the salary deferral amount? That is available to both 401k and SEP-IRA plans.


I was under the assumption that SEP IRA only allowed profit sharing contributions (employER), but even if I am wrong (which I may be) then I needed to create the solo 401k anyways to roll the previously opened SEP into the solo 401k to set me up to do backdoor ROTH conversions. The original mistake was the opening of the SEP by my advisor straight out of school. What is the advantage of a SEP over a solo 401k? I haven't found one yet.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby BolderBoy » Mon Jul 15, 2013 10:51 pm

whitecliff wrote:I was under the assumption that SEP IRA only allowed profit sharing contributions (employER), but even if I am wrong (which I may be) then I needed to create the solo 401k anyways to roll the previously opened SEP into the solo 401k to set me up to do backdoor ROTH conversions. The original mistake was the opening of the SEP by my advisor straight out of school. What is the advantage of a SEP over a solo 401k? I haven't found one yet.


You can do the salary deferral in either SEP-IRA or 401k. I did it for many years when I had a SEP-IRA.

Not a big mistake to have a SEP-IRA. Solo 401k plans have not been available but for the last 13 years or so for sole props. Less paperwork with a SEP. Also, public disclosure on form 5500 is NOT required of a SEP and is required of a 401k with more than X assets.

As others have mentioned, make sure the 401k you set up allows for rolling over outside retirement plan assets, such as a SEP. Vanguard solo 401k does not allow this.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby whitecliff » Mon Jul 15, 2013 11:06 pm

BolderBoy wrote:As others have mentioned, make sure the 401k you set up allows for rolling over outside retirement plan assets, such as a SEP. Vanguard solo 401k does not allow this.


Yes I really want to stay with vanguard so fidelity will accept SEP to 401k transfers which vanguard will not. But vanguard will accept 401k to 401k transfers. So I was going to roll over to fidelity and then right back to vanguard. A little bit of a pain but not a huge deal.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby EmergDoc » Tue Jul 16, 2013 1:51 am

BolderBoy wrote:
You can do the salary deferral in either SEP-IRA or 401k. I did it for many years when I had a SEP-IRA.



Careful with your phrasing here. It requires less income to max out a Solo 401K with $51K than a SEP IRA with $51K. There is an income range where a Solo 401K allows you to contribute more money than a SEP because the 401K allows an employee contribution (first $17.5K can go straight in) then something like 18.5% of income after that. Whereas with the SEP IRA, it's 18.5% of your income from the get go.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby Buysider » Tue Jul 16, 2013 8:38 am

So EmergDoc,

If I have enough income on my own business, I can put the $51k in my SEP. The W-2 income from the separate business would not apply to the cap, so in theory I could put in another $51k if that job allowed? Seems like a great deal! I imagine in the medical profession there are ways to structure your comp between self-employed and hospital W-2 to allow that. I'm just looking at a part-time thing with a very generous match ...
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby Spirit Rider » Tue Jul 16, 2013 9:36 am

BolderBoy wrote:
whitecliff wrote:I was under the assumption that SEP IRA only allowed profit sharing contributions (employER), but even if I am wrong (which I may be) then I needed to create the solo 401k anyways to roll the previously opened SEP into the solo 401k to set me up to do backdoor ROTH conversions. The original mistake was the opening of the SEP by my advisor straight out of school. What is the advantage of a SEP over a solo 401k? I haven't found one yet.


You can do the salary deferral in either SEP-IRA or 401k. I did it for many years when I had a SEP-IRA.

I hope this is a confusion of terminology. whitecliff is correct there is absolutely NO employee salary deferral in a SEPIRA. There is only a profit sharing/employer match in a SEPIRA. In a Solo401k there is both a employee salary deferral and an employer match

In order to do a $40K SEPIRA contribution for a sole proprietorship you would need > $209K in net self-employment earnings. A corporation would only need $160K.
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Re: is this legal/allowed? [Contribute to Solo 401k and SEP]

Postby BolderBoy » Tue Jul 16, 2013 1:02 pm

Spirit Rider wrote:I hope this is a confusion of terminology. whitecliff is correct there is absolutely NO employee salary deferral in a SEPIRA.

Worse than confusion of terminology - it is OLD info. After reading your response I did a search and found this:

"Effective for tax years beginning January 1, 1997, SARSEPs can no longer be established. Employers that established SARSEPs prior to January 1, 1997, are allowed to continue maintaining these plans." The SAR is the salary deferral component.

I was allowed to do it because my plan was already in place so I could continue it. Thank you for pointing out my error.

In that case, I'll join the others who say to change to a 401k plan of some sort. And OP's idea of rolling the SEPIRA into a 401k is good. I did that with my SEPIRA in 2003.
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