SEP-IRA to Solo 401k

Submitted by Steven Goodman on Fri, 2023-09-08 19:09

Not knowing my income from year-to-year, I’ve been making small monthly contributions to an existing SEP-IRA at Fidelity for more than a decade. With higher than expected income this year, I opened a Solo 401k this week in an effort to keep my income below the level that will increase my Medicare premiums in 2025. I stopped funding the SEP last week, but today, Fidelity tells me (no one mentioned it before now) I can’t contribute to the 401k. If correct, is there an easy fix and, more importantly, have I jeopardized the tax-favored status of the SEP? Any suggestions would be greatly appreciated.



Submitted by William Tuttle on Fri, 2023-09-08 23:01

  • A Form 5305-SEP IRA plan cannot be maintained for the same tax year as a qualified plan, e.g. 401K plan. Fidelity only offers a 5305-SEP IRA plan.
  • While a 401k plan is maintained from adoption until termination.
  • A SEP IRA is only maintained in tax years contributions are made for. Contributions for the prior tax year made in the following calendar year until the tax filing deadline including extensions do not maintain the SEP IRA for that following tax year.
  • The relatively easy fix is to remove all SEP IRA contributions and taxable earnings for the 2023 tax year as excess contributions. 
  • Properly removed SEP excess contributions are treated a having not been made. This fixes the SEP IRA compliance error.
  • You can then make the compliant one-participant 401k employee deferrals and employer contributions for 2023. If you did not make the effective date of the 401k 1/1/23, amend it to allow full employer contributions for the year
  • If you had significant taxable earnings there is a more involved process to rollover the entire SEP IRA balance in a tax-free manner. That also resolves the compliance issue.

Submitted by Steven Goodman on Sat, 2023-09-09 18:57

Thanks soooo much for your insights.  Your suggestions sound quite reasonable and should resolve the issues that I never intended to create.  I was just trying to lower my income enough so there’s no IRMAA in 2025–not “double dip” my retirement contributions.  I plan to write Fidelity this weekend and beg (almost literally) for an experienced representative/department manager to call me in the next several days so we can adopt the strategies you outlined.  We’ll see how that goes–while the reps this week seemed to geniuinely wanting to help, their answers varied depending on the representative I was speaking with.  Wish me luck and thanks again.

Submitted by William Tuttle on Mon, 2023-09-11 03:45

  • I hate to break it to you. Writing such a letter to Fidelity will be an exercise in futility. Fidelity will just tell you to contact your tax advisor for the proper steps.
  • It is not the responsibility of a SEP IRA or one-participant 401k provider to help fix employer retirement plan compliance errors.
  • When you adopt these plans, you take on the primary responsibility of plan administration and compliance.

I have given you the straightforward steps to take. If you do not trust what I have laid out, do your own research or get a professional opinion. There are few accountants well versed in correcting employer retirement plan compliance errors. You will want at a minimum a professional third party administrator (TPA) or an ERISA lawyer. This will not be free:

  1. Request removal of your 2023 SEP IRA excess contributions and earnings.
  2. Any earnings will be taxable for the 2023 tax year.
  3. If the effective date of your one-participant 401k was not 1/1/23, amend it allow contributions to be based on your full year’s self-employed earned income.
  4. You can then make 2023 one-participant 401k employee deferrals and employer contributions up your eligible amounts based on that income
  5. You will not be double-dipping, because the 2023 excess SEP IRA contributions and earnings were removed. This also resolves any compliance issue.

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