Funding solo 401(k) with IRA MRD's--Allowable?--?Double Taxation?

[robbie]

I am a 72yo, self-employed sole proprietor, still working (hopefully 3 more years or so). I have some large IRA's and a Solo 401(k) which covers only me and my wife.

I wish to a) reduce current taxes from MRD's;

b) avoid reducing my pension savings till I stop working, and

c) continue to grow them tax deferred.

My tentative plan is to take my IRA MRD's, with no tax withheld, and to use that cash to fund my 401(k) contribution (within the limits allowed by my compensation). Otherwise I do not have enough available cash flow to fund the maximum contribution by Oct. 15th (my tax filing date with extensions).

It seems to me that this would essentially allow me to defer tax on the MRD's till they are later withdrawn from the 401(k).

Is this a feasible plan? Some have said since I am using "post tax dollars" to fund

the 401(k) they would be subject to double taxation.

I need some expert feedback, which would be much appreciated.

[Bird]

It's not clear which year you are making the 401(k) contribution for. Any election to defer income for 2004 should have been in place by 12/31/2004. There is some debate about when the contributions are due; theoretically they are being withheld from your "pay" as of 12/31 and should be deposited as soon as possible. If you elected a percentage and don't determine your income until Oct 15, you might argue that it's not due until then.

That timing issue aside, I don't see a problem with using your RMDs to fund additional contributions. It's no different from "spending" the RMDs and "saving" some other money instead of "spending" some other money and "saving" the RMDs. (It's not quite that easy if you're not a sole proprietor).

[david rigby]

Don't overlook any required minimum distributions from the 401(k) plan.

[mbozek]

You are exchanging an 04 tax deduction with 05 income, eg, 10k in taxable MRDs for 05 will be contributed top claim a deducton for 04 The transaction is a wash taxwise. How are you going to reduce your 05 taxable income for the MRDs excpt by repeating the procedure next year?

[robbie]

Thanks Bird, Pax, and Mbozek.

Bird, I am glad that you see no problem with using the MRD's this way. I know one isn't allowed to 'rollover' an MRD but I didn't think this was the case here. As far as timing goes, these are indeed 2004 contributions and I was advised that I could make them as late as Oct. 15th.

Pax, thanks for calling my attention to the MRD required from the 401k.

Mbozek, you're pinpointing a very important issue. I do not anticipate being in the same cash crunch when the time comes for the 2005 contributions. I've discovered an amazing new secret technique called 'saving"!! <g>