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SEP + 401(k) contribution


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Solo Proprietor earlier this year funded a SEP-IRA for the 2021 tax year
Now (due to a surprise increase in earnings) he wants to fund a Solo 401(k) - because he will be able to contribute the max @ $58,000 which he won't be able to with the SEP

I am aware you can't fund both a SEP and Solo $401(k) in the same tax tax assuming the SEP was established using IRS Form 5305-SEP. That being said, what options, if any does the owner have in reversing/canceling the SEP contributions? And instead fully funding the Solo(k) for 2021?

Thank you in advance

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  • 2 weeks later...

First, you have until the businesses tax filing deadline including extensions to remove excess SEP IRA contributions. Second, you may not have to remove the excess contributions. Call Schwab and explain the problem. Their SEP IRA is a prototype SEP IRA which can be maintained with a 401k for the same tax year.

I believe (with verification from Schwab), you can adopt a prototype SEP IRA, rollover the 5305-SEP IRA balance to the Schwab prototype SEP IRA, adopt a one-participant 401k and make the employee deferrals. Then you can decide if you want to rollover the SEP IRA to the one-participant 401k and even whether to make future employer contributions to the SEP IRA or 401k (subject to the annual addition limit either way).

Note: The sooner your one-participant 401k year-end balance reaches $250K, the sooner you will have to file Form 5500-EZ. However, there maybe other valid reasons to rollover the SEP IRA balance and make future employer contributions to the one-participant 401k.

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