Discussion:SEP IRA & Solo 401k
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Discussion Forum Index --> Advanced Tax Questions --> SEP IRA & Solo 401k
Discussion Forum Index --> Tax Questions --> SEP IRA & Solo 401k
| 20 October 2008 | |
| I have a client who is 100% owner of a single member LLC - files as a disregarded entity for federal tax purposes. He maxes his SEP IRA. Can he also participate in a Solo 401K plan? | |
| 20 October 2008 | |
| I believe he can sponsor a Solo 401k and the SEP at the same time but the SEP cannot be based on the IRS model (i.e. adopted by filing Form 5305-SEP) and appropriate language must be included limiting the Sec. 415 contributions. | |
| 20 October 2008 | |
| What model must the SEP be based on? Currently it is based on the IRS model. I wanted to know what steps I should take so I have both going on to maximise his deferral | |
| 20 October 2008 | |
| It would have to be a prototype plan (usually designed by banks, brokerages etc.) or an individually designed plan. However, I don't see how he would maximize his deferral by having both SEP and 401(k). | |
| 21 October 2008 | |
| Why contribute to both plans? Why not just contribute to the 401(k) plan? The SEP-IRA limitation is 25% and the profits sharing contribution in the 401(k) plan is also 25%. | |
| 29 November 2008 | |
| You can either take Solo 401 (k) or SEP-IRA but not both in the same taxable year.
Solo 401 (k) gives the higher deductions because of the employee deferral. This is in addition of 25% of the earned compensation ( limited to $46,000.00) | |
CarlLaFong (talk|edits) said: | 29 November 2008 |
| There is nothing in the law to prevent the taxpayer from participating in a 401(k) plan and a SEP plan in the same year. | |
Lmcdon9822 (talk|edits) said: | 29 November 2008 |
| From what I understand, we are talking about a small business client. He can either contribute to a solo 401(k) or SEP-IRA, not both. He is a single memeber LLC, to the solo 401 (k) will be better for him since he can contribute more.
As Carla is saying, if the client had a W-2 job AND the single member LLC, he would be able to contribute to his employer's 401(k) and contribute to his solo 401(k) OR SEP-IRA. The funds going into the solo 401(k) or SEP-IRA can only be from his business. | |
| November 30, 2008 | |
| Yes, he can contribute to both a 401(k) and a SEP. There is no good reason to, but there is absolutely not a rule against it. | |
| 30 November 2008 | |
| Agree with LH2004 and Carl. There is nothing in the law to prevent participation in both plans. Participant loans are not allowed in a SEP-IRA. | |
| 30 November 2008 | |
| "There is no good reason to, but there is absolutely not a rule against it."
While that may be true for two plans which are both sponsored by the same entity, there is a very good reason if the two plans are sponsored by unrelated entities. E.g., University Medical Group operates a 401(k) with profit sharing and contributes max to doc's (a non-owner of UMG) account after doc contributes his own salary deferal. Doc does consulting on the side, makes $200k. He can set up his own SEP and contribute 25% of comp. So doc gets $45k (or whatever the current limit is) in the UMG 401(k) plus he contributes another $45k to the SEP. The limit on the employee is the salary deferal limit. The $45k limit is not on the employee, but on the plan. Since the two plans are operated by unrelated entities, the limit on the one is unaffected by the limit on the other. Not for everyone but does work given the right set of facts. | |
| November 30, 2008 | |
| Again, that is no reason to use a SEP rather than a 401(k). | |
| 1 December 2008 | |
| Are you arguing that the doc would be better off setting up a 401(k) for his Sch C consulting income rather than a SEP, even though his salary deferal limit had already been reached through his participation in the UMG 401(k)? If so, I am interested in hearing why a solo-401(k) with an ER contribution and $0 EE salary deferal would be more advantageous than a SEP. | |
Death&Taxes (talk|edits) said: | 1 December 2008 |
| Ability to borrow would be one 'pro.' Requirement to file 5500 when assets exceed 250K is one downside. | |
| December 1, 2008 | |
| If he needs the salary deferral to reach the 415 limit at the day job and does not need it to reach the limit at his self-employment, then there is no contribution advantage. If he can reach the 415 limit at the day job without salary deferral, then, even if he can reach it at self-employment without a salary deferral, using it there would give him more complete investment control over more of his money and might let him reach the limit earlier in the year.
In addition to loans, a qualified plan would also exempt debt-financed real estate from UBIT, allow holding life insurance, allow investment in collectibles, apparently exempt the plan from state UBIT, and give creditor protection under ERISA (which probably doesn't make a difference). If none of those things matter, then it's a tie (other than the trivial burden of a potential 5500 filing); there's no circumstance where there is any significant advantage for the SEP. | |
| 1 December 2008 | |
| Might I ask, just to clarify - client contributed the $20K salary deferral to his solo 401(k) account, but put the 25% of salary into his SEP account. Both accounts were set up under the same business, and the SEP was set up via signing form 5305-SEP, rather than a prototype or customized plan document.
Is there any problem with this? Thanks | |
| 2 December 2008 | |
| Technically, the 5305-SEP is designed for employers with only one plan. However, I see nothing wrong with the contribution formula as long as the 415 limit was not exceeded. | |
| 2 December 2008 | |
| Thanks, Spiderman.
Even though the total contribution amount is OK, I'm concerned about two issues that might make the client vulnerable - the statement in the instructions for form 5305-SEP stating that the form can't be used if the employer currently maintains any other qualified plans; plus the fact that eventually we will be skirting the $250K form 5500 filing rule related to the 401(k) account by having funds put into the SEP account that should have gone into the 401(k) account. I'm thinking of having the client transfer the erroneous contributions that were made into the SEP account into the 401(k) account (which is allowed under the 401(k) plan document), in order to make things right. Does this sound logical? Thanks. | |
