Roth Conv with Money Purchase & Profit Share Plans
Is there any reason why a self employed individual would want to continue to maintain both a money purchase and a profit share plan (paired plans)? Can’t they just terminate the plans, and move the money into a SEP IRA or IRA which could be converted to a Roth? I have recently encountered several individuals maintianing this dual qualified plan structure.
My thought is this: Terminate the plans and eliminate the 5500 filings. Move the assets into a SEP IRA if you are going to continue making contributions and/or into a Roth IRA which would give you the opportunity to convert some or all into a Roth.
Am I missing something? Other than paying the taxes and some final fees for the 5500 filing, why wouldn’t someone do this?
I appreciate any feedback, random thoughts or “one up” me on the the idea. Seems like it makes a lot of sense.
Thanks, TEH
Permalink Submitted by mk foss on Tue, 2010-01-12 03:33
There was a time when you needed the Money Purchase/Profit Sharing combination in order to get the maximum tax deduction for a self-employed person. The law was changed a number of years ago and I think inertia is responsible for the plans that remain. The Money Purchase is the type of plan that needs spousal consent for loans and beneficiary changes. It may be slightly more complicated to terminate than the profit sharing plan.
If there is a participant other than the owner and spouse, there may be some creditor protection with these plans that would not be available with a Roth or SEP. A related pary other than a spouse may be enough to get creditor protection.
If that’s a factor, you still may want to combine the two plans instead of maintaining both.