Solo 401K post ownership change...

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Topic Author
Eyes405
Posts: 2
Joined: Fri Nov 15, 2019 3:17 pm

Solo 401K post ownership change...

Post by Eyes405 » Fri Nov 15, 2019 3:19 pm

Unique scenario. Had 39% ownership in a LLC that sold to an equity backed group end of Oct. Had the organization structured with the LLC (several employees) as pass through entity holding all assets and dividing/passing profits to my personal SCorp and my business partners C-Corp. Post acquisition I'm no longer a stakeholder in the LLC and have become a W2 employee of the LLC. I am being put on the new parent company benefits package which includes a 401K. Problem is, due to the timing of this transaction they are not moving us/me to their benefits until Jan 1, 2020 and I am unable to contribute to the 401K till then. I had a substantial payout as part of the acquisition so am trying to leverage any and all tax advantaged vehicles possible. Have already done a backdoor Roth for myself and my wife but have not historically had any vehicles at the LLC or my SCorp level because it wasn't something the majority partner wanted to entertain. Couldn't do a solo 401K in my SCorp d/t my ownership % in the LLC. My SCorp has always only had myself as an employee and I run a W2 payroll for myself through it of $87K yearly and have the rest pass through as draws. My questions...
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1. Now that I am not a stakeholder in the LLC and am the only employee within my SCorp, can I establish and max out a solo 401K by the end of the year since I am not allowed to participate in the company 401K till Jan 1st?
2. Could I contribute to the company plan for 2019 after Jan 1st?
3. If I can do the solo 401K through my SCorp, max contribution would = $19K personal + 20% of my $87K W2 compensation through the SCorp?
4. I have been told that only the employee contributions can be done as Roth contributions within a solo 401K. Employer contributions are mandatory pre-tax. Is this true?

Sorry for novel. In a situation where my CPA is telling me to seek an adviser and the advisers I talk to tell me I need to ask my CPA. Plus the advisers all want silly $ to manage a solo (IMO) and with this likely being a one time thing, I am looking to manage myself through Vanguard. Not looking for authority answers here, but simply some guidance. I'm not new to the forum as a reader but am for sure a new contributor. Also a fairly new investor. I come here often seeking wisdom and hope to be wise enough some day to actually contribute..

HomeStretch
Posts: 2882
Joined: Thu Dec 27, 2018 3:06 pm

Re: Solo 401K post ownership change...

Post by HomeStretch » Fri Nov 15, 2019 5:55 pm

I use a Solo 401k. But I don’t think it’s worth the hassle to set up a Solo 401k for the remainder of 2019. If you do set the plan up, you’ll need to get it established and 2019 employee deferrals made through payroll by 12/31/19.

Spirit Rider
Posts: 11874
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401K post ownership change...

Post by Spirit Rider » Fri Nov 15, 2019 7:22 pm

The problem is that you had a control group until you sold the LLC. All of the profits from the LLC that pass thru to your S-Corp and the resulting compensation can not be the basis for adopting a one-participant 401k.

If the S-Corp owned the interest in the LLC, your CPA should definitely be able to tell you whether a portion of the aquisition payout can be used to pay you compensation. If the answer is yes, then you can adopt a one participant 401k for new compensation.

Employee deferrals can only be deducted from compensation not already paid with a pay date by 12/31. The maximum employer contribution is 25% of your W-2 wages not from the control group. You will have to pay new compensation, the $87k already paid is irrelevant.

Your new employer can not allow you to make 2019 contributions based on 2020 compensation.

Employer contributions are pre-tax by their very nature. It is not compensation you can pay taxes on. However, E-Trade's one-participant 401k supports an in-plan Roth rollover (IRR). You can make the pre-tax employer contribution and then immediately do an IRR to the designated Roth account. This is "effectively" a "Roth" employer contribution.

Topic Author
Eyes405
Posts: 2
Joined: Fri Nov 15, 2019 3:17 pm

Re: Solo 401K post ownership change...

Post by Eyes405 » Fri Nov 15, 2019 8:03 pm

Thanks @spiritrider. I figured you would have the answer after reading some other threads you have been active on.

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