How to transfer the contribution from Sep-IRA to Solo-401k

[Guest EPlus]

What is the procedure to transfer the contribution made to Sep-IRA in 2008 (by ignorance) to a solo-401K which established last month (2008)? So far the total contribution may be more than the limit allowed by SEP alone, but definitely less than the limit of Solo-401K.

If I can not move the money around, will rollover the Sep-IRA account to solo-401k solve the problem? Or what other solutions available?

I tired to find a local competent tax adviser, but all the people I talked to, seems have no knowledge about this.

Thank you very much for the help.

[Appleby]

The fix…

 Keep the SEP for this year. The contribution to the SEP will take place of the profit sharing contribution to the Solo-k. This may be overly simplified but…The solo-k has two funding buckets (1) salary deferral contributions and (2) employer contributions , which is treated as profit sharing contributions. For someone who has a SEP and the Solo-K at the same time, the employer contribution can be made to the SEP or to the Solo-k as an employer contribution. The tax results would be the same for either.

 Make the salary deferral contribution to the Solo-k

 If the SEP is a 5305-SEP, amend it to a prototype SEP. This is necessary, as an employer may not maintain a 5305-SEP for any year that the employer also maintains a qualified plan.

 If you no longer want to keep the SEP, rollover the amount to the Solo-k. This can be done at anytime.

[Guest EPlus]

Thank you very much for the reply, but forgive my ignorance, I am not quite sure what I need to do exactly. Do I need to follow all steps listed here?

My current situation is like this (not exactly the numbers, but close).

1> If I have only SEP, I can contribute approximately $8000 for year 2008 (based on roughly 25% profit calculation). But I have already contributed to $10,000 to the SEP account. So it's $2000 extra.

2> Since I opened a Solo-401k, I should be allowed to contribute an extra $15,500. If I did not put the $10,000 into SEP mistakenly, I can still contribute 13,500.

I would like contribute to the maximum allowed by law, right now, the mess-up will not ONLY prevent me from making additional contribution, but also lead to an over contribution in SEP. I would like to correct this simple mistake. In the most simple term, if I rollover all the SEP to the new Solo-K right now, is the problem resolved, and I can contribute additional 13,500?

Thanks again for your wisdom and expertise.

Eplus

---------------------

The fix…

 Keep the SEP for this year. The contribution to the SEP will take place of the profit sharing contribution to the Solo-k. This may be overly simplified but…The solo-k has two funding buckets (1) salary deferral contributions and (2) employer contributions , which is treated as profit sharing contributions. For someone who has a SEP and the Solo-K at the same time, the employer contribution can be made to the SEP or to the Solo-k as an employer contribution. The tax results would be the same for either.

 Make the salary deferral contribution to the Solo-k

 If the SEP is a 5305-SEP, amend it to a prototype SEP. This is necessary, as an employer may not maintain a 5305-SEP for any year that the employer also maintains a qualified plan.

 If you no longer want to keep the SEP, rollover the amount to the Solo-k. This can be done at anytime.

[Bird]

I think Appleby is on the right track, just use the SEP for the employER part of the contribution and make your deferral contribution to the 401(k). You'll have an excess in the SEP, but I don't think you'll know for sure what that excess is until after the end of 2008. Figure it out then, take it out then, and if you want, roll over the rest after that's done. I wouldn't roll from the SEP now because then you'll have an excess rollover to come out of the 401(k); it's not an impossible situation but I would limit the mess by letting the dust settle.

To be clear, you can/should contribute $15,500 to the 401(k). Don't try to net the $2,000 overage; you need to make the full 401(k) contribution and separately take out the excess $2,000 from the SEP. They're different contributions types.

It's bordering on trivial, but you can maintain both the SEP (for employer contributions) and the 401(k) (for employee contributions) indefinitely, and possibly postpone the reporting requirements (starting when you have $250,000 in assets) on the 401(k).

(And for the record, if you are self-employed (sole prop or LLC), your max employer contribution is (roughly) 20% of your profits, before contribution (that will come to roughly 25% after the contribution). It's not quite that simple because there's an additional adjustment for self-employment taxes.)

[Guest EPlus]

Thank you Bird and Appleby;

Since I am self employed, based on past records and the progress so far this year, I am about 100% sure I did over contribute to my SEP this year.

Right now, I am about 90% clear what I need to do (just mend my current SEP to prototype one - even I don't know how to do it).

I would like to know if I can simply rollover the excess from the SEP (after mending) to the Solo-401k (as part of 15,500 limit)? If so, what's the penalty and right paper works to IRS? If not, what's the right procedure?

Also the SEP contributions I made in the past was calculated by Tax software, so I am very confident it's right.

Thank you so much.

Eplus.

[Appleby]

It's bordering on trivial, but you can maintain both the SEP (for employer contributions) and the 401(k) (for employee contributions) indefinitely, and possibly postpone the reporting requirements (starting when you have $250,000 in assets) on the 401(k).

Good suggestion.

I agree with Bird about waiting until the end of the year. Who knows, you may receive more income, resulting in the SEP contribution not being an excess.

Since I am self employed, based on past records and the progress so far this year, I am about 100% sure I did over contribute to my SEP this year.

An excess nondeductible SEP contribution results in traditional IRA contribution. That is automatic for tax purposes. You would need to notify your IRA custodian, in writing, of the excess SEP amount and include a reminder that they should flip/recharacterize the $2,000 from a SEP contribution to an IRA contribution. You can leave it in your IRA as a contribution or remove it as a ‘return of excess’ along with any earnings/losses.

Right now, I am about 90% clear what I need to do (just mend my current SEP to prototype one - even I don't know how to do it).

Talk to your SEP IRA custodian. They may have a prototype document you can use. If they do, completing the prototype document, and indicating that it represents an amendment of your plan as of 01/01/08 should suffice. Ask them about their procedure for making the change.

I would like to know if I can simply rollover the excess from the SEP (after mending) to the Solo-401k (as part of 15,500 limit)? If so, what's the penalty and right paper works to IRS? If not, what's the right procedure?

No. See above.But technically, since your business is unincorporated ( I think- right?), you can simply request the return of excess IRA contribution and send the amount to your Solo-k as a salary deferral. Technically, it is still moving from one to the other, but the actual process is important.

[Guest mjb]

Before doing anything check out IRS publication 560 and the proposed IRS regs on seps which provide that excess SEP contributions are treated as an IRA contribution (5/6K). Also if you are self employed your max SEP contribution is 20% of your net earnings from self employment. Pub 560 tells you how to determine the max contribution. You could establish a 401k plan for employee contributions in 2008 if you can contribute more than 20% of your net earnings from SE. You can always rollover the SEP account to the 401k plan.

[Guest EPlus]

Thank you so much for the great detail.

No I am not incorporated, just myself. (may hire my spouse in the future)

I just talk to Fidelity, they don't have any prototype SEP, and state it's absolutely impossible for them to amend one. Also they discourage to contribute SEP and Solo-401k at the same year.

So how to amend my current SEP to a prototype one? I searched the internet, seem nobody provide it. Anybody know any brokerage firm provide it?

Also in this great forum, I find another discussion thread about SEP and solo, here is the link

http://benefitslink.com/boards/index.php?showtopic=27150

User DGM, a lawyer. claimed if people setup SEP first, and solo-401k a fewer years later (like me case), we can contribute to both accounts without doing anything (subject to the aggregate deduction limits). Can other experts confirm this? Fidelity will not say it's OK, but they did not insist it's illegal.

Is DGM still around? Will you and other experts willing to be my tax adviser? I am more than willing to pay to get the thing right and save time. I am in the middle of TN.

Thank you all.

Eplus.

It's bordering on trivial, but you can maintain both the SEP (for employer contributions) and the 401(k) (for employee contributions) indefinitely, and possibly postpone the reporting requirements (starting when you have $250,000 in assets) on the 401(k).

Good suggestion.

I agree with Bird about waiting until the end of the year. Who knows, you may receive more income, resulting in the SEP contribution not being an excess.

Since I am self employed, based on past records and the progress so far this year, I am about 100% sure I did over contribute to my SEP this year.

An excess nondeductible SEP contribution results in traditional IRA contribution. That is automatic for tax purposes. You would need to notify your IRA custodian, in writing, of the excess SEP amount and include a reminder that they should flip/recharacterize the $2,000 from a SEP contribution to an IRA contribution. You can leave it in your IRA as a contribution or remove it as a ‘return of excess’ along with any earnings/losses.

Right now, I am about 90% clear what I need to do (just mend my current SEP to prototype one - even I don't know how to do it).

Talk to your SEP IRA custodian. They may have a prototype document you can use. If they do, completing the prototype document, and indicating that it represents an amendment of your plan as of 01/01/08 should suffice. Ask them about their procedure for making the change.

I would like to know if I can simply rollover the excess from the SEP (after mending) to the Solo-401k (as part of 15,500 limit)? If so, what's the penalty and right paper works to IRS? If not, what's the right procedure?

No. See above.But technically, since your business is unincorporated ( I think- right?), you can simply request the return of excess IRA contribution and send the amount to your Solo-k as a salary deferral. Technically, it is still moving from one to the other, but the actual process is important.