SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

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fidobogo
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SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by fidobogo » Wed Jul 08, 2015 6:53 pm

Summary: I did a retroactive SEP-IRA (for 2014 contributions), and now I want to do a Solo-401k (for 2015 contributions) that has an effective date from before the real date that the SEP-IRA was created.

I'm nothing near a tax expert, so please forgive me for asking the following question in detailed layperson's terms.

Given the following situation....


  • I'm self-employed (sole proprietor, with no employees), have been for years, and will be through at least 12/1/2015.
  • On 4/1/2015, I created a SEP-IRA, retroactive effective date 1/1/2014.
  • On 4/1/2015, I made my entire 2014 tax year contributions to the SEP-IRA, retroactively.
  • Have made no contributions to the SEP-IRA that would appear on my 2015 tax return.

I want to do this...


  • On 8/1/2015, create a Solo-401k, effective retroactively to 1/1/2015. (Note that the SEP-IRA intended for 2014 contributions wasn't even created, in real calendar dates, until after the retroactive effective date of the Solo-401k intended for 2015 contributions.)
  • After Solo-401k is created, and before end of real year, make 2015 Solo-401k contributions, based on income for the entire 2015 year (i.e., since the 1/1/2015 effective date of Solo-401k, not only since the 8/1/2015 real date that the Solo-401k was created).

Can I do that, without breaking any IRS rule, and without getting into a headache at tax return time (such as having to write a free-form letter to the IRS to explain something that the 1040 schedules don't capture)?

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PaddyMac
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by PaddyMac » Wed Jul 08, 2015 8:15 pm

You can't afaik open a solo 401k retroactively. The date of opening will be the creation date.

However, I opened a 401k for our self-employed business in August 2012 and maxed it out for 2012 fully. There is no rule that says you have to save 1/12th every month etc. So just go ahead and open it, and then start maxing it out.

In any case, you do NOT want to open the 401k BEFORE the SEP, as that would be breaking the rules. The SEP form says that you have no other qualifying account when you open the SEP.

Spirit Rider
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by Spirit Rider » Wed Jul 08, 2015 11:23 pm

fidobogo wrote:On 8/1/2015, create a Solo-401k, effective retroactively to 1/1/2015. (Note that the SEP-IRA intended for 2014 contributions wasn't even created, in real calendar dates, until after the retroactive effective date of the Solo-401k intended for 2015 contributions.)

Yes, you can do this. A Solo 401k's effective date can be set to 1/1 of the initial plan year. Note: Even though you opened and funded your SEP IRA on 4/1/2015, it was effective 1/1/2015 and the contribution was for the 2014 plan year. The date of the contribution in 2015 is only applicable for determining whether you were covered by an employer plan for that year.

After Solo-401k is created, and before end of real year, make 2015 Solo-401k contributions, based on income for the entire 2015 year (i.e., since the 1/1/2015 effective date of Solo-401k, not only since the 8/1/2015 real date that the Solo-401k was created).

Can I do that, without breaking any IRS rule, and without getting into a headache at tax return time (such as having to write a free-form letter to the IRS to explain something that the 1040 schedules don't capture)?

Yes, you can do this provided you haven't made any SEP IRA contributions for the 2015 plan year. To be technically correct, you should contact your SEP IRA provider and terminate the SEP IRA plan before adopting the Solo 401k. There are no reporting requirements to the IRS for either the provider or you on termination. You can choose to keep the SEP IRA account or rollover the funds as you so choose.

PaddyMac wrote:You can't afaik open a solo 401k retroactively. The date of opening will be the creation date.

The Solo 401k effective date is a specified date on the adoption agreement, separate from the date of the adoption agreement. It can specify any date within the current plan year, but may not be before the first day of the plan year. Contributions cannot be made on any income prior to the effective date. So especially for profit sharing contributions, this date should be as early as possible.

fidobogo
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by fidobogo » Wed Jul 08, 2015 11:33 pm

Spirit Rider wrote:Yes, you can do this. ... Yes, you can do this provided ... you should contact your SEP IRA provider and terminate the SEP IRA plan before adopting the Solo 401k.


Thanks, Spirit Rider! I'll prepare the Solo 401k paperwork, then terminate the SEP IRA, and then adopt the Solo 401k.

Lafder
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by Lafder » Wed Jul 08, 2015 11:49 pm

I had a SEP and finished my 2014 contributions in early April 2015 before I turned in my tax returns.

I opened a solo401k around February or March of this year without putting any money in.

After my final SEP contribution for 2014, I made my next contribution to the solo 401k for 2015.

This should not be a problem since you are only using one or the other for each tax year.

As far as "shutting down" the SEP, I do not believe anything needs to be done other than stop making contributions. Otherwise it still exists as a SEP and could potentially be used in the future. No one told me I needed to "shut it down" whatever that means, not my accountant, and not Vanguard where my SEP and now my solo401k are both held.

Do not worry about "effective dates. " What matters is your contribution dates. As others have pointed out, there is no requirement when your contributions occur through the year, other than before your tax filing date. You could potentially fund your entire 2015 contribution to your solo 401k in early April 2016.

I am not a tax accountant or attorney, but I am self employed and I have a SEP and solo 401k :)

edit** I just went and looked at my plan documents on line at Vanguard. It does list 1/1/15 as the "plan effective date" and I am not sure if I turned in the paperwork February or March. So it did allow a retroactive effective start date. My first contributions were late April or early May.

lafder

Lafder
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by Lafder » Thu Jul 09, 2015 12:07 am

Spiritrider,
Are you sure of this "Contributions cannot be made on any income prior to the effective date"

My effective day is 1/1/15 so no problem. But I never heard this before when I was reading about solo401ks.

lafder

Spirit Rider
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by Spirit Rider » Thu Jul 09, 2015 12:01 pm

Lafder wrote:Spiritrider,
Are you sure of this "Contributions cannot be made on any income prior to the effective date"

My effective day is 1/1/15 so no problem. But I never heard this before when I was reading about solo401ks.

lafder

One is never sure when it comes to the IRS.

I don't have a specific cite of the tax code. However, this was separately stated to me by both Vanguard and Fidelity representatives. It only makes sense, since the business's plan is not in effect until the effective date.

chartcab3785
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by chartcab3785 » Thu Jul 09, 2015 12:13 pm

Spirit Rider wrote:You can choose to keep the SEP IRA account or rollover the funds as you so choose.


Note that the VG Solo 401k doesn't allow incoming rollovers. Not that you implied that they did.

Spirit Rider
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by Spirit Rider » Thu Jul 09, 2015 12:15 pm

Lafder wrote:As far as "shutting down" the SEP, I do not believe anything needs to be done other than stop making contributions. Otherwise it still exists as a SEP and could potentially be used in the future. No one told me I needed to "shut it down" whatever that means, not my accountant, and not Vanguard where my SEP and now my solo401k are both held.

From the IRS SEP Plan FAQs:

If I have a SEP, can I also have other retirement plans?

You can maintain both a SEP and another plan. However, unless the other plan is also a SEP, you cannot use Form 5305-SEP; you must adopt either a prototype SEP or an individually designed SEP.

What are the notification requirements when a SEP terminates?

When you terminate your SEP plan, it is a good idea to notify the employees that you are discontinuing the plan. You may need to notify the financial institution that you chose to handle the plan that there will be no more contributions and that you will terminate the contract or agreement with it. Do not notify the IRS of the plan's termination.

If you cannot maintain a 5305 SEP IRA and a Solo 401k at the same time, it would only make sense that you need to terminate the SEP IRA before adopting the Solo 401k. We are talking about the SEP IRA plan not the SEP IRA account. The account can remain indefinitely.

SpideyIndexer
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by SpideyIndexer » Sat Oct 07, 2017 1:29 am

A blast from the past. I had a similar situation but not identical:

1. SEP IRA created in 2014. Some contributions made in 2014, and topped off in March 2015 for TY 2014.

2. Solo-401(k) created June 2015 and funded, and topped off to the max on March 2016, for TY 2015.

3. Later in SEP was rolled over into Solo-401(k).

Question: Does the amount of SEP contributions made in March 2015 for TY 2014 affect the allowable Solo-401(k) contributions for TY 2015? At first glance, it seems it shouldn't. Possibly there could be some non-obvious details of timing of employee and employer contributions, but it is my understanding that for both SEPs and Solo-401(k) the TY the contributions are made FOR will be the TY the contribution is claimed as an adjustment to income.

Spirit Rider
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by Spirit Rider » Sat Oct 07, 2017 8:44 am

You are correct, all retirement plan contributions are deductable in the tax year they are for. This is true whether they are Individual retirement plans or employer retirement plans like a SEP IRA or a one-participant 401k. This is also true for determining when the employer had an active retirement plan.

However, for a SEP IRA, the actual calendar year of the contribution is reported on Form 5498 and is used in determining the employee's "active participant" status in applying the traditional IRA deduction income limits. This can lead to some notable interactions.

Bear with me here on this. Your 2015 SEP IRA contribution was for the 2014 tax year and did not interfere with your one-participant 401k for the 2015 tax year.

Here is where it gets interesting. Any SEP IRA contributions in the 2015 calendar year for the 2014 tax year and any one-participant 401k contributions for the 2015 tax year regardless of when made, only cused you to be an active participant for 2015. If you made no SEP IRA contributions during the 2014 calendar year, that alone did not make you an active participant subject to traditional IRA deduction income limits. Of course, that would not be true if you were an active participant in another employer's retirement plan.

SpideyIndexer
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by SpideyIndexer » Sat Oct 07, 2017 12:00 pm

Spirit RIder,

Thanks very much for your reply. In your last paragraph, I think "cused" was a typo for "caused."

So you are saying I was an active participant in both plans for 2015. My 2015 contribution for the SEP for made FOR TY 2014 and I claimed no IRA deductions in 2015. However, that information does not appear on the 2015 form 5498 which Vanguard sent to the IRS. Perhaps this could cause the IRS to question my 2015 employer contributions since I maxed out the solo 401(k).

I have received a CP2000 in which the IRS "corrected" our 2015 contributions to a very small level. I can't make any sense of their figure and suspect it is so low because they didn't know about the solo 401(k) opened in 2015 as there was no reporting from the custodian. When I discussed this with the IRS, the rep could not tell me how they made that calculation and requested a copy of my contribution worksheet. She also suggested that verification of my 2015 solo 401(k) contributions may help to close the file quicker, though not necessary at the point. But since I also have received a CP3219A, I probably should do so ASAP. From what you are telling me, it may be helpful to included documentation that the 2015 SEP contribution was made FOR TY 2014.

Spirit Rider
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by Spirit Rider » Sat Oct 07, 2017 9:22 pm

SpideyIndexer wrote:
Sat Oct 07, 2017 12:00 pm
So you are saying I was an active participant in both plans for 2015. My 2015 contribution for the SEP for made FOR TY 2014 and I claimed no IRA deductions in 2015. However, that information does not appear on the 2015 form 5498 which Vanguard sent to the IRS. Perhaps this could cause the IRS to question my 2015 employer contributions since I maxed out the solo 401(k).
You were a 2015 "active participant" in both plans for applicability of the 2015 IRA deduction income limit.

This is a total separate issue from what is an "active employer plan". The SEP IRA was an "active employer plan" for 2014 and the one-participant 401k was an "active employer plan" for 2015. So you did not have two "active employer plans" in 2015.

If your SEP IRA contribution for 2014 was made in 2015, it should be reflected in the 2015 5498 for the SEP IRA. Here are the 2015 Instructions for Forms 1099-R and 5498

Box 8. SEP Contributions
Enter employer contributions made to a SEP IRA (including salary deferrals under a SARSEP) during 2015 including contributions made in 2015 for 2014, but not including contributions made in 2016 for 2015. Trustees and issuers are not responsible for reporting the year for which SEP contributions are made. Do not enter employee contributions to an IRA under a SEP plan. Report any employee contributions to an IRA under a SEP plan in box 1. Also include in box 8 SEP contributions made by a self-employed person to his or her own account.

SpideyIndexer
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by SpideyIndexer » Sun Oct 08, 2017 2:47 am

SR, thanks again. I agree with what you are saying about the 5498.

I'm still wondering why the one-participant 401(k) plan contributions were questioned on the CP2000. I suppose the answer is that 2015 was the first year that my spouse and I both contributed to one-participant 401(k) plans, so the amount in form 1040 line 28 jumped to a larger value than previously. AFAIK, one-participant 401(k) contributions are not reported to the IRS by the custodian, so contributions claimed cannot be reconciled with other filings in the IRS database, until the account is sufficiently large to require form 5500 filings.

Our income and AGI both dropped in 2015 which could also be triggers.

SpideyIndexer
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Re: SEP-IRA, Solo-401k, retroactive effective dates, and overlapping

Post by SpideyIndexer » Tue Oct 10, 2017 11:51 pm

Today an IRS rep said since I had a large amount of income adjustment on line 28 without justification (the solo 401(k) contributions) likely that is why it appeared on the CP2000. In that case a random percentage of those who open a solo 401(k) and make fairly large contributions might expect see a CP2000.

I wonder if there a proposal to file solo 401(k) contributions before form 5500 is required. Could me less stressful for taxpayers.

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