Starting Qualified Plan When SIMPLE-IRA exists

[Lou S.]

What are the penalties of starting a Qualified Plan in a year when a SIMPLE IRA is in existence? I know you are not allowed to terminate a SIMPLE-IRA mind year but what if no one elects to make contributions to it?

In 2017 on advice of prior accountant, 2 employee shop, both 50% owners set up a SIMPLE IRA for 2017 and continued for 2018.

Contributions for 2017 were funded.

No contributions have yet been made for 2018 and the 2 owners will be the only eligible employees of the SIMPLE IRA in 2018. They are having a much better year than expected and their new accountant would like to do a 401(k) plan with PS component to maximize deduction.

If they establish a 401(k) with PS what is the affect on the following

1 - The existing SIMPLE IRAs that hold only the 2017 contributions?

2. The SIMPLE-IRA if no contributions are made for 2018?

3. The SIMPLE-IRA for 2018 if contributions are made for 2018?

4. The newly formed 401(k) Profit sharing plan?

I know you are not supposed to have a SIMPLE-IRA and Qualified Plan in the same year but if the penalty is remove the $0 of 2018 contributions along with  the $0 of earnings, is there really a penalty for having both?

[Jim Chad]

IMNTBHO  Simple IRA plans are basically IRA plans.  So each year stands alone.  If you start a 401(k) plan, you will disqualify the SIMPLE plan for 2018 and all contributions (none?) are taxable.

I have done this when the only contributions were January deferrals.

[dan.jock]

Attached is a comprehensive description of how to solve this issue.  This is mostly difficult for the CPA/bookkeeper.  If $0 has been made so far, I think you situation will be easy enough to resolve.

Correcting a bad SIMPLE.pdf

[Larry Starr]

23 hours ago, Lou S. said:

What are the penalties of starting a Qualified Plan in a year when a SIMPLE IRA is in existence? I know you are not allowed to terminate a SIMPLE-IRA mind year but what if no one elects to make contributions to it?

In 2017 on advice of prior accountant, 2 employee shop, both 50% owners set up a SIMPLE IRA for 2017 and continued for 2018.

Contributions for 2017 were funded.

No contributions have yet been made for 2018 and the 2 owners will be the only eligible employees of the SIMPLE IRA in 2018. They are having a much better year than expected and their new accountant would like to do a 401(k) plan with PS component to maximize deduction.

If they establish a 401(k) with PS what is the affect on the following

1 - The existing SIMPLE IRAs that hold only the 2017 contributions?

2. The SIMPLE-IRA if no contributions are made for 2018?

3. The SIMPLE-IRA for 2018 if contributions are made for 2018?

4. The newly formed 401(k) Profit sharing plan?

I know you are not supposed to have a SIMPLE-IRA and Qualified Plan in the same year but if the penalty is remove the $0 of 2018 contributions along with  the $0 of earnings, is there really a penalty for having both?

First, Dan Jock has given you a PDF of the absolute best explanation of how this works. Good job Dan!  Now, just to deal with some of the specific things you say above, let me add some more to that great piece that Dan gave you.

You ARE allowed to terminate a SIMPLE-IRA mid year; if you set up any qualified plan during the year, you have made the SIMPLE a COMPLEX (a name given by the author of the SIMPLE, SEP and SARSEP Answer Book and my co-author). By adopting the new plan, you have made the SIMPLE no longer allowable; effectively, you've terminated it.  If you had contributions that had already been made, you'd have to deal with them. In the stated case, no contributions made so no fixing to do.  Just go ahead and set up your new plan and you have NO PROBLEMS.

The answers to your 1, 2 and 4 numbered questions above is: NO EFFECT AT ALL.  As to number 3, see the posted PDF for how that can be dealt with.  

I've set up MANY plans during the year when there was an existing SIMPLE or SEP.  Just thread the needle with regard to already made contributions and you will be just fine.

[Lou S.]

Jim, Dan & Larry thanks to all 3 of you.

[Flyboyjohn]

Will someone repost the link to the "Correcting a Bad SIMPLE" PDF?

Many thanks.

[Mike Preston]

16 minutes ago, Flyboyjohn said:

Will someone repost the link to the "Correcting a Bad SIMPLE" PDF?

Many thanks.

Uh. Look up? 

[Larry Starr]

6 hours ago, Flyboyjohn said:

Will someone repost the link to the "Correcting a Bad SIMPLE" PDF?

Many thanks.

That link above does work; I just tested it.