SEP and Individual/Solo 401(k)

Submitted by Brandon Blanchard on Mon, 2023-10-16 17:40

I have a new client that is self-employed and files a schedule C. She has been making SEP IRA contributions for many years, usually about $18k/yr. She just became a client of mine this month and we are now shifting to the I 401(k) plan for her. Prior to her becoming a client she made about $6,000 of 2023 SEP IRA contributions. Those have now stopped. She plans on making her $30,000 2023 Employee contribution into her I 401(k) soon. She then plans to make a 2023 employer contribution into her I 401(k) plan on or before 4/15/24. My understanding is that the CPA will need to calculate the maximum 2023 employer contribution for the I 401(k) and the CPA will have to reduce that by $6,000 since the employer made a $6,000 2023 SEP contribution already. Is that correct? Anything else I am missing here? First time I have ever had a client fund both a SEP and Solo 401(k) for the same tax year.



Submitted by Alan - IRA critic on Mon, 2023-10-16 22:08

 

Submitted by Brandon Blanchard on Wed, 2023-10-18 15:33

Thanks. I read the thread. Super helpful! Seems like there are at least 2 options. Option 1: Remove all the 2023 SEP IRA contributions and associated earnings. This will be complicated because my client was making $600/mo. contributions (through July 2023) into her SEP IRA at Merrill Lynch earlier this year before her SEP IRA was transferred to my firm. She has not made any 2023 SEP IRA contributions since 8/1/23. So we would have to go back to Merrill Lynch and have them calculate the earnings on those $4,200 of 2023 SEP IRA contributions that occured @ ML. Then we will have to take that number and calculate earnings on that money once the account transfered to my firm. Quite complicated but if this is done this would allow her to maintain and fund a solo 401(k) for tax year 2023. Option 2: Continue funding the SEP IRA for tax year 2023 and just wait until 2024 to open and fund the solo 401(k). No SEP IRA funding for tax year 2024 and beyond.  I am wondering if there is a third option. In reading the thread it notes “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.” Our plan was to roll her entire SEP IRA at our firm into her new solo 401(k) once it was opened so that she would no longer have any assets in a SEP and her only retirement account would be the solo 401(k) (on a separate note this would open up the backdoor Roth opportunity for her). Can we establish her solo 401(k) for tax year 2023 and immediately rollover the entire SEP balance (which would include her $4,200 of 2023 SEP Contributions and earnings) into the solo 401(k) before year end? The SEP IRA would then cease to exist. Would this then allow for her to make 2023 solo 401(k) contributions?  

Submitted by William Tuttle on Thu, 2023-10-19 04:35

  • No, simply rolling over the SEP IRA assets to a one-participant 401k does not cure the compliance error.
  • The SEP IRA was maintained by making contributions for the 2023 tax year. A one-participant 401k plan would be maintained for 2023 because the plan was adopted in 2023.
  • The prohibition against simultaneously maintaining a 5305-SEP and a qualified plan (i.e 401k) applies.
  • However, Schwab has a prototype SEP IRA plan which can coexist with a 401k.
  • Call Schwab and see if they have a solution. I no longer describe the steps necessary.

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