SEP and Solo 401k

Submitted by IRAQuestion5 on Wed, 2023-01-18 15:49

Hello-

Client started a new business last year (LLC on Schedule C with no employees). Can they set up a new SEP now using 5305-SEP and make a small contribution for 2022 and then in March of this calendar year set up a solo 401k and make contributions for 2023?

Thank you!



Submitted by William Tuttle on Wed, 2023-01-18 20:42

  • You can not “maintain” a 5305-SEP IRA plan and a qualified (401k) plan for the same tax year.
  • While a SEP IRA plan is “maintained” for any tax year you make contributions.
  • A 401k plan is “maintained” from adoption until termination.
  • Therefore, you can adopt a SEP IRA for the 2022 tax year and make 2022 contributions until your tax filing deadline including extensions. Also you can adopt a one-participant 401k and make contributions in 2023. This is because the 2022 SEP IRA contributions made in 2023 will be for the 2022 tax year and the one-participant 401k contributions will be for the 2023 tax year. If you make no SEP IRA for the 2023 tax year, the SEP IRA will only be maintained for the 2022 tax year. The one-participant 401k will be maintained for the 2023 tax year.
  • However, under the TCJA Effective with the 2020 tax year. A one-participant 401k can be adopted and employer contributions made until the tax filing deadline including extensions.
  • Therefore, a one-participant 401k can be immediately adopted, 2022 employer contributions made, 2023 employee deferrals and employer contributions when desired.


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