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5305 (model) SEP contributions with Solo 401(k)

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Hi all. I've recently become aware of the apparent limitations re: maintenance of a 5305-SEP while also having a Solo 401(k). I will try to spare you the unnecessary details and just hit the relevant points...

I have a small side business that is all but inactive at this point. I used to use a SEP-IRA for retirement savings related to this endeavor, but moved things to a Solo 401(k) in 2010. The SEP did, however, remain open (albeit empty) at that point. I made one additional contribution to the 401(k) after setting it up in 2010 but it has otherwise been essentially idle, just sitting there holding the existing funds.

In the intervening years, not having been aware of the restriction related to 5305 SEP-IRAs while maintaining a qualified plan, I made a handful of small-ish employer contributions to the SEP on my behalf. Don't ask why I did it this way, convenience or naïveté I guess.... Regardless, this was done during a time when there was no actual activity with the 401(k); again, I just made that one contribution after setting it up in 2010 and then left it alone.

So... Here we are.

Please note that I have no concerns about over-contributions or anything like that. The SEP contriibutions were safely below any relevant limits, and I never even contributed to both in the same year. Nonetheless, I have just discovered that these SEP contributions may not have been technically allowable, and am trying to figure out what (if anything) to do.

To complicate matters a bit further, I have since converted those (formerly deductible) SEP contributions to my Roth IRA. Thus, I actually wound up paying taxes on them, but the money is no longer in the SEP to "undo" if I wanted to somehow pursue that course of action.

One option would be to just do nothing and let this mistake fade into ancient history. This would have been the default course of action if I hadn't stumbled across the info alerting me to the potential problem. In this case, I probably would've gone through life none the wiser. Barring an audit in the near future (knock on wood) this issue would probably have been lost in the sands of time.

The other option would be to (somehow) fix it. The problem is, I'm really not sure how to undo this, or if it's even worth pursuing.

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1 hour ago, shutdown said:

One option would be to just do nothing and let this mistake fade into ancient history.

Do that.  The issues with maintaining these two plans are mostly technical and it would take a pretty zealous agent to go after you for anything...assuming you have/had no employees; that might change my answer at least as far as doing the "right" thing.

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30 minutes ago, Bird said:

Do that.  The issues with maintaining these two plans are mostly technical and it would take a pretty zealous agent to go after you for anything...assuming you have/had no employees; that might change my answer at least as far as doing the "right" thing.

No, I've had no employees. It's just been me for both the SEP and the Solo 401(k).

Thanks for taking the time to reply, I appreciate it.

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You may wish to consider fixing it if the balances in the 401(k), now Roth IRA, are large. As I understand what the IRS has been allowing in these circumstances is to file under VCP with a correction of, get this, I/we "promise not to do it again".  

With that said, based on what you have written I'm not sure you have anything to fix.

Which gets to the issue of cost to correct, because if you are going to formally correct, my advice is that you hire somebody in the industry to go over the details to make sure there is something to correct. Then you have to consider the fees with the VCP filing and finally, if the IRS starts demanding more than a mea culpa, whatever pound of flesh that results in, as well.

Good luck!

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1 minute ago, Mike Preston said:

You may wish to consider fixing it if the balances in the 401(k), now Roth IRA, are large. As I understand what the IRS has been allowing in these circumstances is to file under VCP with a correction of, get this, I/we "promise not to do it again".  

With that said, based on what you have written I'm not sure you have anything to fix.

Which gets to the issue of cost to correct, because if you are going to formally correct, my advice is that you hire somebody in the industry to go over the details to make sure there is something to correct. Then you have to consider the fees with the VCP filing and finally, if the IRS starts demanding more than a mea culpa, whatever pound of flesh that results in, as well.

Good luck!

Yeah, I was looking at the cost of a VCP prior to posting. It's not cheap... The minimum fee to file (not including prep fees if I need help) is now $1500. Obviously, I'd rather avoid that if possible.

According to the IRS:

"Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don’t go back more than the last six years."

Worst case scenario, assuming that this is actually something that can/should be fixed, does that timeline mean once the issue is essentially dead once three (or six) years passes from when the contributions were made/reported? Or is this sort of thing a forever problem?

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On 12/31/2018 at 2:56 PM, shutdown said:

Yeah, I was looking at the cost of a VCP prior to posting. It's not cheap... The minimum fee to file (not including prep fees if I need help) is now $1500. Obviously, I'd rather avoid that if possible.

According to the IRS:

"Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don’t go back more than the last six years."

Worst case scenario, assuming that this is actually something that can/should be fixed, does that timeline mean once the issue is essentially dead once three (or six) years passes from when the contributions were made/reported? Or is this sort of thing a forever problem?

To quote the bard... fuggedaboutit!

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