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SIMPLE IRA and non-contributing Solok


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A potential client has a SIMPLE IRA plan for their business.  They are continuing the SIMPLE, covering all employees and making the required contributions, but the owner wants to establish a solok and rollover SIMPLE balance into the solok only to take advantage of other investments not offered in the SIMPLE.  The owner does not intend to ever make contributions to the solok.  The  SIMPLE plan has been in existence for more than 2 years. Would this be allowed?

 

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1. what is the point of a 401(k) plan with no contributions? at some point it would be deemed terminated and pointless

2. The employees would likely need to be covered by the 401(k) - if they have enough service they would be in the testing and testing would fail if they aren't offered the plan

3. A solo k is a regular 401(k). Solo k is a marketing term and personally I find it irritating. So all the regular compliance applies even if marketed as a "solok)

4. What investments aren't available in a regular IRA? I'm guessing this person wants a loan, or to purchase company stock. Those are the only two I regularly see available in a 401(k) but not easily in an IRA. Neither of which are great ideas either. If the investments are available in a different IRA format, they should stick to that, and not start a 401(k). 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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see the IRS's page on what happens when a plan has no contributions. 

https://www.irs.gov/retirement-plans/no-contributions-to-your-profit-sharing-401-k-plan-for-a-while-complete-discontinuance-of-contributions-and-what-you-need-to-know

I think if a plan was set-up knowing there would never be contributions - there would be an argument that it was never a qualified plan to begin with, which would put the assets tax deferred status at risk. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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On 11/14/2023 at 2:47 PM, justanotheradmin said:

3. A solo k is a regular 401(k). Solo k is a marketing term and personally I find it irritating.

LOL-. Let those marketers live.

Agree with you on everything ( except being irritated😂 )

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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On 11/14/2023 at 1:47 PM, justanotheradmin said:

4. What investments aren't available in a regular IRA? I'm guessing this person wants a loan, or to purchase company stock. Those are the only two I regularly see available in a 401(k) but not easily in an IRA. Neither of which are great ideas either. If the investments are available in a different IRA format, they should stick to that, and not start a 401(k). 

Generally it's real estate or a limited partnership as well. Often it's difficult to hold in an IRA with a regular custodian. I would recommend just finding one of those specialty IRA custodians rather than opening a plan.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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18 hours ago, Paul I said:

Fundamentally, (or should I say SIMPLy stated), an employer with a SIMPLE IRA cannot have any other retirement plan. 

https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan

Actually that is more specific to contributions being made or accrued in the same year; see below. So the mere existence of another plan is not prohibitive.

(D)Arrangement may be only plan of employer
(i)In general
An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer (or any predecessor employer) maintained a qualified plan with respect to which contributions were made, or benefits were accrued, for service in any year in the period beginning with the year such arrangement became effective and ending with the year for which the determination is being made. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the preceding sentence shall be applied without regard to any qualified plan in which only employees so described are eligible to participate.

 

Ed Snyder

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