UM1234

Thank you so much for your helpful reply!

Hello, Client over age 50 is a self-employed consultant with no employees. Doing well and may end up netting > 265K in 2015. Also thinking of starting to invest in real estate. Most likely, he would be a passive investor, not an active participant. He is interested in putting away as much as possible for retirement, both from his SE income and his potential RE investments. I have some questions: 1. SEP vs. solo 401k for SE income. If he were under 50, then if he nets > 265K I would say a SEP is better b/c it would allow the full 53K contribution and would be administratively simpler than a solo K. But b/c he is over 50, should he do a solo K even if he nets > 265K, so he can do the extra 6K catch-up contribution, which I don't believe is possible in a SEP? 2. Retirement contribution on real estate income. I don't encounter this very much b/c many real estate investors reinvest everything into more real estate. Here are a few thoughts/questions, looking for reactions: 2a. If he has negative income for tax purposes from the real estate due to depreciation, then he can't make a retirement contribution even if the real estate is cash flow positive. Correct? 2b. If he creates an LLC and buys property on his own, AND he has positive income for tax purposes, then I doubt he could do a solo K on the real estate income because the real estate LLC would be part of the same controlled group as his consulting LLC (where he is assumed to be maxing out his SEP or solo K). Could he do a SEP? A SIMPLE? Anything else I'm missing? 2c. If he invests passively and gets a K-1 for his share of income/deductions/credits, AND he has positive income for tax purposes, can he create any sort of retirement plan to shelter some of this income? Or would there need to be a retirement plan sponsored by the real estate investment company, which I doubt there would be? Thank you in advance for any thoughts you can provide. I hope this thread will be useful to as many people as possible.

I never got the chance to come back and say thank you very much to both of you for the helpful replies. So thank you

Hi, any comments on the following would be greatly appreciated. Thank you! Client is an ER physician working as an independent contractor. He has no employees. He is an LLC taxed as a sole proprietorship; files Schedule C with his tax return. Background On 3/28/15, client signed IRS Form 5305-SEP and other paperwork required by TD Ameritrade (TDA) to open a SEP at TDA. TDA doesn't offer an individually designed SEP, just the 5305-SEP. Before 4/15/15, client will be contributing $6,620 to the SEP and deducting this amount on his 2014 tax return. This is the max contribution calculated by client's CPA. For contributions based on his 2015 self-employment income, client isn't sure yet whether he will stay with the SEP, or move to a solo 401(k). Part of it depends on how much he ends up making in 2015. That is, will a solo 401(k) end up letting him contribute more than a SEP, or will his income be high enough that both options allow him to max at $53K? He doesn't plan to make any contributions for 2015 until March/April 2016, when his tax return is done and his income is known. I'm trying to make sure I understand the deadlines and other issues if he decides to move to solo K. Issue 1 From my research so far, I believe the rules for establishing and contributing to the solo K would be as follows. Do you agree, or am I off base on any of this? Deadline to establish solo K would be 12/31/15. He would have until at least 4/15/16 (later?) to deposit his employee deferrals. He would have until 10/15/16 to deposit his employer contributions. Issue 2 I see that one cannot maintain a SEP established under IRS Form 5305-SEP at the same time as a qualified plan. So, if he decides to move to a solo K, he could get rid of the SEP by rolling it into the solo K, assuming solo K plan document accepts rollovers from SEP. But, does the fact that his SEP will have had money in it during 2015 mean that he "maintained" it during 2015, even if he doesn't make any contributions to it for tax year 2015?

I got the following comment and wanted to post it to get people's thoughts: Why not open a solo 401(k) for his SE income and make the employer's (profit sharing) contribution to that account (the same amount that he can put into the SEP) and save the rollover step? I was thinking we should avoid solo 401(k) because the admin is more complex than a SEP. I am looking at this as follows, comments welcome. If you do a solo 401(k), you can go two routes. Either use a custodian's prototype document (Schwab, TD Ameritrade, etc.), or pay a TPA to do a plan document for you. If use prototype document, I see three potential concerns: 1. The prototype documents I've seen require a lot of decision-making and box-checking on the various features of the plan. If a layperson did this on their own, they could easily make mistakes. If I help a client do it, I'm much less concerned but there are still a few arcane choices I'm less familiar with. 2. Even assuming the prototype document is implemented correctly, there is also a risk of it not staying up to date with required amendments over time. I am not sure how proactive the custodians are about pushing out amendments. Even if they are proactive, I would guess the client has to adopt the amendments. Busy clients are not likely to do this, and even if I as a financial advisor work with the client's solo 401(k), I would be concerned about missing required amendments. 3. The custodians' prototype plans that I've seen do not include any recordkeeping or TPA work. The client would be on their own. Assuming solo 401(k), there is no compliance testing so I think the main issues are Form 5500 preparation and recordkeeping. Form 5500 is only needed if plan assets > 250K, and even if required, it's easy to prepare (although it is one more step that the client or I must remember to do each year). I think recordkeeping is the bigger issue. If the client in this example just makes profit sharing contributions, he would only have one source of funds, so recordkeeping might not be needed (?). But, if he rolls an old 403(b) or pension into his solo 401(k), now he has two sources of funds: profit sharing and rollover. In this case, recordkeeping would be useful, but I wonder if it's absolutely necessary since all money is pre-tax? If use a TPA, I see two potential concerns: 1. Cost for the plan document and the annual admin. 2. Client's time to administer the plan and deal with TPA. Again, comments would be very welcome on all of this. Thank you!

Thank you to all!

Great comment, thank you. I am a registered investment advisor custodying with Schwab and TD Ameritrade. Both custodians' IRA distribution forms use the language "Direct Rollover" to an employer plan. Schwab's form makes clear they would report the distribution using Code G on Form 1099-R. TD's form does not specify what code they would use. I feel the reporting guidance is sufficiently clear that TD would use Code G as well, but I could check with them to be sure. What do you think about the comment above re: the "one rollover per year" rule not applying to transfers from an IRA to a 401(k)? The language at the above-linked IRS page, as well as the language in the actual IRS Announcement 2014-15 linked below, refers only to IRAs. Also, it seems the IRS would catch violations of the "one rollover per year" rule by looking for more than one IRA distribution with a potentially taxable 1099-R code like 1 or 2. So it also seems like code G, a nontaxable code, would not be flagged by the IRS. And, it feels like the spirit of the "one rollover per year" rule is to limit you to one potentially taxable distribution per year. In the situation I describe, if the IRA custodian makes the check payable directly to the client's 401(k) plan and issues a 1099-R with code G, there is no potential taxation. But, thinking conservatively, no reference to 401(k)s is not the same as explicitly stating that IRA-to-401(k) transfers are not limited by the "one rollover per year" rule. http://www.irs.gov/pub/irs-drop/a-14-15.pdf Thanks again for any further thoughts that anyone can provide!

Hi, I have a single-member LLC, and this year I started a 401(k) profit sharing plan. For federal tax purposes, I'm treated as a sole proprietor and I file a Schedule C with Form 1040. As a single-member LLC, I don't generate a W-2 for myself. So my question is: if I make 401(k) deferrals, do I need to report them to the IRS, and if so, how? For people receiving a W-2, 401(k) deferrals are reported in box 12. Thank you very much!

Thanks. I received a private reply from someone else saying: "Just a reminder that the one per year rollover rule does not apply to rollovers from IRAs to 401(k)s.." Also, it's worth noting that the IRA one rollover per year rule applies only to rollovers, i.e., not to trustee-to-trustee transfers. Quote from IRS website, and link, follow. The link is a very useful summary of IRS guidance on this issue. "You can, however, continue to make as many trustee-to-trustee transfers between IRAs as you want. You can also make as many rollovers from traditional IRAs to Roth IRAs ("conversions") as you want." http://www.irs.gov/Retirement-Plans/IRA-One-Rollover-Per-Year-Rule If anyone else sees a problem with doing annual transfers from a SEP IRA to a 401(k), please reply. I see no problem with it at this point.

Hi, Client participates in 401(k) at his W-2 job. Also has a SEP for self-employment income from work completely unrelated to the W-2 job. Wants to maintain the ability to make a nondeductible traditional IRA contribution each year, and convert immediately to Roth at no tax cost. This will not work if he has money in a SEP IRA. So, can he contribute to his SEP each year, then immediately roll the money into his 401(k), assuming the plan accepts rollovers? This would leave him with $0 in pre-tax IRAs, and allow him to continue the annual nondeductible contributions with conversion to Roth. I don't see any reason why he can't do this. For example, the Individual Retirement Account Answer Book, 20th ed., copyright CCH 2014, states in several places that a SEP IRA is treated exactly as a regular traditional IRA, except for contribution limits. So, once his contribution is in the SEP IRA, he should be able to roll it into his traditional IRA. Thank you for any reaction you can provide!

Hi, I searched the net and this forum and couldn't find answers, so I'm posting here. I realize this is a very long post. Any comments are very much appreciated. Client, a physician under age 50, is a W-2 employee of a hospital and will contribute $17,500 to his 403(b) there in 2014. Assume he receives $2,500 of employer match, for a total of $20,000 in additions to the 403(b). This W-2 employment is ending ~ November 2014 and is being immediately replaced by new W-2 employment that offers a 401(k) plan with $4,500 match, assuming client makes max contribution which he will. Technically, the new employer’s match is discretionary, but it is reasonable to expect the full match each year. Client will not contribute to new 401(k) in 2014 because he will have maxed his 403(b). Client also expects $45K of independent contractor income from moonlighting at another hospital (net of expenses) in 2014. He has received some of that income paid to him directly, and will receive the remainder in an LLC he just created. For simplicity, let's say he has $45K "net earnings from self-employment income." The hospital at which he moonlights is not affiliated with the hospital at which he is a W-2 employee. He has no employees in his independent contractor work. Client expects $70K net earnings from SE income in 2015 and beyond, all paid to his LLC. Issue 1 I am trying to determine which retirement plan is best for his self-employment income. Options I see are SIMPLE IRA, SEP IRA, and solo 401(k). Analysis is below with questions in bold red. I would welcome comments. Summary: 2014 SIMPLE SEP Solo 401(k) Client Pre-Tax Contributions $30,350 $26,500 $26,500 Match from W-2 Employer $2,500 $2,500 $2,500 Total $33,350 $29,000 $29,000 2015 and Beyond SIMPLE SEP Solo 401(k) Client Pre-Tax Contributions $31,600 $31,500 $31,500 Match from W-2 Employer $4,500 $4,500 $4,500 Total $36,100 $36,000 $36,000 Note: “Client Pre-Tax Contributions” includes W-2 401(k) employee deferrals, SIMPLE/Solo 401(k) employee deferrals, and SIMPLE/SEP/Solo 401(k) employer contributions. It’s the sum of all the dollars the client avoids income tax on. 1. SIMPLE IRA. Can client do $12K employee deferrals even though he has maxed his W-2 403(b) in 2014 / would max his W-2 401(k) in 2015 and beyond? If yes, then: a. For 2014, max employee deferral is $12K, plus an employer contribution of 3% x $45K = $1,350. Total $13,350. Plus $17,500 to W-2 403(b) = $30,850 total pre-tax contributions by client. Plus $2,500 assumed 403(b) match = $33,350 total retirement additions. b. For 2015 and beyond, assume employee max still $12K, plus an employer contribution of 3% x $70K = $2,100. Total $14,100. Plus $17,500 to W-2 401(k) = $31,600 total pre-tax contributions by client. Plus $4,500 401(k) match = $36,100 total retirement additions. 2. SEP IRA. No employee deferrals. Max employer contribution is 20% of net earnings from self-employment income. Can client max this employer contribution even though he has maxed his W-2 403(b) in 2014 / would max his W-2 401(k) in 2015 and beyond? If yes, then: a. For 2014, 20% x $45K = $9K. Plus $17,500 to W-2 403(b) = $26,500 total pre-tax contributions by client. Plus $2,500 assumed 403(b) match = $29K total retirement additions. b. For 2015 and beyond, 20% x $70K = $14K. Plus $17,500 to W-2 401(k) = $31,500 total pre-tax contributions by client. Plus $4,500 401(k) match = $36K total retirement additions. 3. Solo 401(k). a. For 2014, no employee deferral because client has maxed 403(b) at W-2 employer. Max employer contribution is 20% of net earnings from self-employment income. Same question as above: Can client max this employer contribution even though he has maxed his W-2 403(b) in 2014 / would max his W-2 401(k) in 2015 and beyond? If yes, then 20% x $45K = $9K. Plus $17,500 to W-2 403(b) = $26,500 total pre-tax contributions by client. Plus $2,500 assumed 403(b) match = $29K total retirement additions. b. For 2015: i. Client should max his W-2 401(k) to capture the $4,500 match. Then I doubt a solo 401(k) would make sense because he couldn’t make employee deferrals if maxing W-2 401(k), and a solo 401(k) carries administration and expense that a SIMPLE or SEP doesn’t. ii. Just to work through the scenarios though: 1. If he can still make the max employer contribution to a solo 401(k) when he is maxing a W-2 401(k), then 20% x $70K = $14K. Plus $17,500 to W-2 401(k) = $31,500 total pre-tax contributions by client. Plus $4,500 401(k) match = $36K total retirement additions. 2. If client makes employee deferrals to a solo 401(k) instead of his W-2 401(k) – which wouldn’t make sense due to the W-2 401(k) match, but just to work through this - then assume employee max still $17,500, plus employer contribution of 20% x $70K = $14K. (I believe you can do 20% x $70K, not 20% of [$70K - $17,500 employee deferral], but tell me if I’m off base.) Total $31,500 pre-tax contributions by client, and $31,500 total retirement additions (no W-2 employer match). Issue 2 In 2014, he will receive some SE income paid directly to him, and some paid directly to his LLC. Say it is $22,500 each, total $45K. Will he create only one plan (SIMPLE, SEP, solo K) and use $45K net SE earnings to determine his contribution? And, will he report the entire $45K on one Schedule C? I am guessing the answer to both questions is Yes, because for federal tax purposes, single-member LLCs are disregarded (they are created under state law, not federal). Again, thank you very, very much for your time!

All good points and very well taken. Thank you very much. I am going to take a 401(k) loan, part of which will go to redeposit $30K in my IRA within 60 days of withdrawing $30K. I will not do a series of rollovers as originally proposed. My HELOC doesn't have a lot of room left but I'm making use of that. I'll look into a signature loan as well.

Thank you, great response. I agree it comes down to how much faith to put in the IRS (chuckling as I write that). I may do two 60-day loans: one from an IRA of mine, and one from an IRA of my wife's. This would comply with the one-rollover-per-person requirement of Bobrow, even though the IRS says they won't enforce until at least 1/1/15. I see no risk with this approach (disagreement welcome). I may also open an individual 401(k) with a loan provision, roll my old 401(k) and IRAs into that, and then take a loan from the individual 401(k). Provided I comply with the requirements to have a 401(k) loan be a nontaxable transaction, this should work.

Hello, I recently withdrew 30K from one of my IRAs for a short-term cash need. I plan to redeposit the money in the same IRA within 60 days. I would like to keep doing a series of 60-day loans until later this year when I will have revenue from my business to pay the IRAs back completely. My wife and I have several IRAs between us. I know there was a recent Tax Court decision that the one-rollover-per-year rule applies per person, not per IRA. Per the following link, the IRS will not start enforcing this until 1/1/2015 at the earliest. http://www.irs.gov/Retirement-Plans/IRA-One-Rollover-Per-Year-Rule So, the Tax Court decision doesn't preclude me from doing a series of 60-day loans as long as I finish in 2014. But, I am still wondering if there will be any problem with the following set of proposed transactions. I think the answer is No (i.e., it is fine to do this). As I understand the current rules, a single IRA can't initiate more than one rollover (distribute $), nor accept funds from more than one rollover (receive $), in the same calendar year. In the below transaction, each individual IRA distributes $ once and receives $ once. 30K out of IRA A, spend it By day 60, roll 30K from IRA B into IRA A By day 120, roll 30K from IRA C into IRA B By day 180, deposit 30K into IRA C from outside earnings Series of 60 day loans complete. Any thoughts/comments are welcome and greatly appreciated. Thank you!

Thank you both very much. I contacted a local TPA that I work with, and they also said they don't issue a 1099 for loans. I really appreciate your replies.

Hi, This may be a dumb question but here goes... If a 401(k) participant takes out a loan, makes payments on schedule, the loan is in full compliance with all requirements (less than $50K and 50% of account balance, there is a promissory note, etc.), and there is no loan offset or default, then does a Form 1099-R need to be issued for the loan distribution? For example: Participant balance is $50K, takes loan for $25K, makes all payments on time. Before loan, 401(k) balance is $50K all in mutual funds. After loan, 401(k) holds $25K in mutual funds and a note from participant for $25K. I am thinking the answer is No, there is no 1099-R issued for the $25K loan distribution. Basing this on the following: 1. Can't find anything in the IRS 2014 Instructions for Forms 1099-R and 5498 saying that a 1099-R should be issued in this case. Instructions only refer to issuing 1099-R in case of deemed distribution due to loan offset or default. 2. TD Ameritrade's qualified retirement plan distribution form has no place to indicate that a participant is taking a loan. Any thoughts are welcome, thank you so much!

Other questions: 1. I know in some cases that part of calculating the max retirement contribution involves subtracting 1/2 the self-employment tax. In the situation I've described, is the max just a flat 25% of 90K (or 134K if W-2 is increased)? Or are there additional steps to the calculation? 2. Also, I believe that for at least some self-employed people, the max ends up being 20% rather than 25%. In the situation I've described, why is it 25% and not 20%? Thank you again so much.

Thank you very much to all who posted. It's extremely helpful. Thoughts on the below are welcome. Thank you! Re: increasing W-2 comp to 134K, it seems to me that the income tax savings of going from 40K to 51K retirement contribution would be almost exactly offset by the increased SE tax. $4,319.70 income tax savings vs. $4,214.80 more SE tax. Calculations below. Even if the tax is a wash, I see two other benefits to bumping up W-2 to 134K. But practically speaking, I'm trying to figure out if these benefits are enough for me to recommend bumping up the W-2. Benefit 1. Client gets $11,000 more into a tax-deferred account where it can compound and hopefully be withdrawn in a lower income tax bracket in retirement. Benefit 2. To the extent one believes Social Security will be around for the long haul, there is some benefit to reaching the SS wage base of $113,700, because you need 35 years of max SS earnings to get the max possible SS benefit. But Client is ~ 35 yrs old so I tend not to put a lot of stock in SS for him. Calculations: Client's marginal income tax rate is 33% federal + 6.27% state = 39.27%. $11,000 additional retirement contribution x 39.27% = $4,319.70 income tax savings. $23,700 more subject to full SE tax @ 15.3% = $3,626.10. ($90,000 + $23,700 = 2013 Social Security wage base of $113,700.) $20,300 subject to Medicare SE tax @ 2.9% = $588.70. ($113,700 + $20,300 = $134,000 total W-2 comp.) $3,626.10 + $588.70 = $4,214.80 total increase in SE tax.

Client makes 250K as self-employed tech consultant. No employees. He wants to put away the maximum possible for retirement. I need to set up a retirement plan for him. He is an LLC taxed as an S-corp. Pays himself 90K in W-2 compensation, and the rest is treated as S-corp dividends not subject to payroll tax. 1. My understanding is that he'll be able to contribute more to an individual 401(k) than a SEP, because he only has 90K W-2 compensation, and a SEP contribution would be calculated just based on the 90K. Am I correct to think individual 401(k) will allow him to contribute more, or am I missing something? 2. Assuming we do individual 401(k), he will do $17,500 in 2013 as pre-tax 401(k) deferrals. I am trying to get an idea of how much profit sharing he'll be able to put in. This leads to questions 2a and 2b below. 2a. For an owner, is the max profit sharing contribution 20% or 25% of net self-employment income? 2b. With an LLC taxed as an S-corp, what number would I use for net self-employment income? 250K total earnings, 160K S-corp profit (250K earnings - 90K W-2 comp), or another number? Thank you in advance for any thoughts you can provide.

1. Client has high income and wants to fund a Roth IRA each year by making a nondeductible Traditional IRA contribution and immediately converting it to Roth. However, client has pre-tax dollars in a Traditional IRA, and the presence of these pre-tax dollars prevents client from converting a nondeductible Traditional IRA contribution tax-free. Assume client does not have a qualified retirement plan account through a current job that could accept a rollover of these pre-tax IRA dollars. Client is not self-employed. However, is it permissible for client to establish a solo 401(k) just for the purpose of accepting a rollover of the pre-tax IRA dollars, so that annual nondeductible Traditional IRA contributions can be converted tax-free? 2. Same situation as #1 except client has an LLC for a small amount of teaching work that yields $1,000 or less of income per year. Seems more likely that this client can set up a solo 401(k), but client is not likely to make any ongoing contributions from this small amount of income, so the purpose of the solo 401(k) is still just for the purpose of accepting a rollover of the pre-tax IRA dollars, so that annual nondeductible contributions can be converted tax-free. So is a solo 401(k) permissible in this case? Thank you very much for any thoughts you can provide!