New Sole-prop SEP IRA after terminated Solo 401k from S-corp?

[Derek K]

Hello. In April of this year(2019), I terminated my [single-owner] S-corp and the Solo 401k I had for it(filing final 5500ez, etc.).  I rolled the Solo 401k funds into an existing IRA so I could terminate the 401k plan. I then moved from NY to FL and opened a new business, operating this time as a sole proprietorship.

I contributed to the Solo 401k in Q1 before dissolving that business, but only $31.5k($19k employee deferral, $12.5k employer contribution)-- short of my limits for solo 401k or an SEP IRA otherwise. I planned on opening an SEP IRA starting in 2020, but now I'm finding I'd like to max deductions for 2019 more than I expected(I had more taxable events than planned), and was wondering if I could open an SEP IRA for the Sole Prop for the 2019 tax year?

Vanguard says their interpretation is that I can't have two plans(401k and SEP IRA) in the same year, due to the same ownership/control of the two companies. When asked for them to point me to anything official to back up that position, they just vaguely pointed me to pub560-- but I can't find anything about multiple plans there, other than 5305-SEP requirements which shouldn't apply(as the 401k was terminated, and the 5305-SEP instructions specify 'presently maintain'; plus, that's just for using the form, not SEP IRA qualification itself).

Is there anyone here that can answer this for me, pointing to some authoritative source?

Thanks.

 

[Larry Starr]

10 hours ago, Derek K said:

Hello. In April of this year(2019), I terminated my [single-owner] S-corp and the Solo 401k I had for it(filing final 5500ez, etc.).  I rolled the Solo 401k funds into an existing IRA so I could terminate the 401k plan. I then moved from NY to FL and opened a new business, operating this time as a sole proprietorship.

I contributed to the Solo 401k in Q1 before dissolving that business, but only $31.5k($19k employee deferral, $12.5k employer contribution)-- short of my limits for solo 401k or an SEP IRA otherwise. I planned on opening an SEP IRA starting in 2020, but now I'm finding I'd like to max deductions for 2019 more than I expected(I had more taxable events than planned), and was wondering if I could open an SEP IRA for the Sole Prop for the 2019 tax year?

Vanguard says their interpretation is that I can't have two plans(401k and SEP IRA) in the same year, due to the same ownership/control of the two companies. When asked for them to point me to anything official to back up that position, they just vaguely pointed me to pub560-- but I can't find anything about multiple plans there, other than 5305-SEP requirements which shouldn't apply(as the 401k was terminated, and the 5305-SEP instructions specify 'presently maintain'; plus, that's just for using the form, not SEP IRA qualification itself).

Is there anyone here that can answer this for me, pointing to some authoritative source?

Thanks.

 

Though I usually refrain from answering questions except those posed by professional plan administrators, I will give you a quick answer since, as always, Vanguard (or Fidelity, or Merril or UBS or any of those types of organizations) will ALWAYS give you the wrong answer.  I am not a fan of DIY retirement planning; you get exactly what you pay for (which will be bad advice). You should hire a professional to guide you, but you won't, you just want free answers.

Anyway, yes, you can do it. The problem is you can't use the standard SEP document to set it up since the IRS reads that "maintain no other plan" as meaning that there be no other plan in the same year.  You would have to have a non standard SEP document that also deals with all the rules that are required to be followed when you have multiple plans in the same year, and organizations like Vanguard can't handle that (that is what us professionals are for). 

You probably shouldn't have terminated your prior plan, but without any expert advice, you did what you did and now have to live with it.  

[Derek K]

6 hours ago, Larry Starr said:

Though I usually refrain from answering questions except those posed by professional plan administrators, I will give you a quick answer since, as always, Vanguard (or Fidelity, or Merril or UBS or any of those types of organizations) will ALWAYS give you the wrong answer.  I am not a fan of DIY retirement planning; you get exactly what you pay for (which will be bad advice). You should hire a professional to guide you, but you won't, you just want free answers.

Anyway, yes, you can do it. The problem is you can't use the standard SEP document to set it up since the IRS reads that "maintain no other plan" as meaning that there be no other plan in the same year.  You would have to have a non standard SEP document that also deals with all the rules that are required to be followed when you have multiple plans in the same year, and organizations like Vanguard can't handle that (that is what us professionals are for). 

You probably shouldn't have terminated your prior plan, but without any expert advice, you did what you did and now have to live with it.  

Thank you for the information and clarification-- I suspected it was something like this...easier for Vanguard to say no than deal with the complexities for less common situations.

I was forced to terminate the Solo 401k plan, as I was dissolving my S-corp. I suppose if I wanted to go through the extra legwork, I could have possibly had the new Sole Prop take over the plan, as with a company acquisition...but it didn't occur to me, and I had plenty of other considerations with dissolution and moving cross-country to deal with...

Thanks.

 

 

-- 

Derek