Solo 401k Restatement, New Solo 401k, or SEP IRA ?

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Topic Author
suddenwealth
Posts: 19
Joined: Fri May 14, 2021 4:41 am

Solo 401k Restatement, New Solo 401k, or SEP IRA ?

Post by suddenwealth »

Hi guys,

In 2019, I stopped working in my self employed business and "early retired", thinking I would no longer work again. I converted my entire solo 401k into a traditional IRA and then started making backdoor rollovers into a ROTH IRA, since i had no income coming in for 2019 and 2020. This was all done at Vanguard. Then, earlier this year, I realized that when I rolled over my solo 401k, it was actually an account termination and that I had to file the 5500 EZ form. I then amended my return and filed the 5500 EZ with the $500 penalty. I still haven't heard back from the IRS saying they have received it, and all is well or anything. All they have done is cash the check.

Fast forward to this year, I'm back working in my business again and I need to open another tax deferred retirement account. Vanguard is saying I need need to complete Individual 401k restatement forms to get my old solo 401k back up. If I complete this and the account is restored, will it cause issues with the "late 5500 EZ return, even though my 401k was technically terminated back in 2019" situation? Can I just start off fresh and open a different Solo 401k with Fidelity or Schwab instead? Should I open a SEP IRA instead? I have no employees and I should be able to max out the limit for the solo 401k or SEP IRA for this year. I was reading something about how SEP IRA's can limit the backdoor roth ability with the pro-rate rule, though I don't totally understand that yet, but I would think that eventually I will be "retiring" again at some point and may want to convert this tax deferred money into my Roth IRA at my leisure, so that is something I should be considering if using a SEP IRA would cause a conflict with that.

These solo 401k's can be a bit tricky. Thanks for the help.
HomeStretch
Posts: 11421
Joined: Thu Dec 27, 2018 2:06 pm

Re: Solo 401k Restatement, New Solo 401k, or SEP IRA ?

Post by HomeStretch »

You are better off opening a SEP-IRA for now if:
1) you are ineligible for a new Solo 401k plan as it has been < 2 years since your old Solo 401k plan was terminated; or
2) if you haven’t received the IRS letter (assuming they send one) accepting your penalty relief program submission and you’re not sure your submission was accurate and complete. Check cashing by the IRS in advance of processing filings is routine so cashing your check doesn’t imply submission acceptance.

Yes, if you have a 12/31 IRA balance (including your current Traditional IRA (TIRA) or a SEP-IRA), any Roth conversion during the same year (such as step 2 of a backdoor Roth) will be subject to pro-rated taxes. So you must be already running into this if you rolled over your Solo 401k balance to a TIRA in 2019 and also did Roth conversions of non-deductible TIRA contributions (as step 2 of your backdoor Roths) in 2019 and 2020. You should be able to verify this by looking at your 2019 and 2020 Forms 8606 filed with your Federal Form 1040s for those years.

If you decide to go with a Solo 401k plan, I don’t believe you are reopening your old Solo 401k plan. Rather you would be opening a new plan with the same plan sponsor (your same business) so your plan sequence # would be 002 (your old plan was likely 001?). I don’t know if you need a new EIN or not for the plan. The Vanguard form of plan document has been recently restated and amended as all Solo 401k plans are going through an IRS-required plan document restatement cycle to reflect law changes since the last restatement cycle 5-6 years ago.

From past forum threads, people seem to receive some good and some not so good advice from brokerages such as Vanguard that offer no-fee mainstream prototype Solo 401k plans. So double-check anything you are told.

I am not an expert on Solo 401k plans. Hopefully someone more knowledgeable such as Alan S. will post in this thread.
Last edited by HomeStretch on Thu Sep 23, 2021 5:23 pm, edited 3 times in total.
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cchrissyy
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Location: SF bay area

Re: Solo 401k Restatement, New Solo 401k, or SEP IRA ?

Post by cchrissyy »

suddenwealth wrote: Thu Sep 23, 2021 4:08 pm Hi guys,

In 2019, I stopped working in my self employed business and "early retired", thinking I would no longer work again. I converted my entire solo 401k into a traditional IRA and then started making backdoor rollovers into a ROTH IRA, since i had no income coming in for 2019 and 2020.

...

I was reading something about how SEP IRA's can limit the backdoor roth ability with the pro-rate rule, though I don't totally understand that yet
hello! i don't know anything about solo 401ks but i do know that having a balance in your traditional or rollover IRA is a problem for your backdoor Roth in the same way as a SEP ira would be
60-20-20 us-intl-bond
SuzBanyan
Posts: 2015
Joined: Thu Jun 02, 2016 11:20 am

Re: Solo 401k Restatement, New Solo 401k, or SEP IRA ?

Post by SuzBanyan »

The prohibition is on setting up a “successor plan” within 12 months of terminating the prior 401k plan. If you terminated the prior plan by distributing all the assets in 2019 and notifying your custodian of such termination, then you should be able to open a new 401k plan without creating tax issues for the prior plan.
Topic Author
suddenwealth
Posts: 19
Joined: Fri May 14, 2021 4:41 am

Re: Solo 401k Restatement, New Solo 401k, or SEP IRA ?

Post by suddenwealth »

SuzBanyan wrote: Thu Sep 23, 2021 9:21 pm The prohibition is on setting up a “successor plan” within 12 months of terminating the prior 401k plan. If you terminated the prior plan by distributing all the assets in 2019 and notifying your custodian of such termination, then you should be able to open a new 401k plan without creating tax issues for the prior plan.
Ya it's been over 12 months since I officially terminated the prior plan, but I didn't send in the 5500 EZ with it. If I would have done everything properly, there be would be no issue and I could just set up a new one. I'm not sure if that matters or not, but I'm also not looking to complicate this issue any further. I wonder if just doing a SEP IRA would make things easier.
SuzBanyan
Posts: 2015
Joined: Thu Jun 02, 2016 11:20 am

Re: Solo 401k Restatement, New Solo 401k, or SEP IRA ?

Post by SuzBanyan »

suddenwealth wrote: Fri Sep 24, 2021 1:21 pm
SuzBanyan wrote: Thu Sep 23, 2021 9:21 pm The prohibition is on setting up a “successor plan” within 12 months of terminating the prior 401k plan. If you terminated the prior plan by distributing all the assets in 2019 and notifying your custodian of such termination, then you should be able to open a new 401k plan without creating tax issues for the prior plan.
Ya it's been over 12 months since I officially terminated the prior plan, but I didn't send in the 5500 EZ with it. If I would have done everything properly, there be would be no issue and I could just set up a new one. I'm not sure if that matters or not, but I'm also not looking to complicate this issue any further. I wonder if just doing a SEP IRA would make things easier.
I don’t think opening a new 401k (002) plan will have any impact on the 5500EZ you already filed for the terminated (001) plan. I assume that the 550EZ has a date for the termination of the 001 plan (I.e., the final date of the final plan year, probably a short year consisting of less than 12 months) which is more than 12 months ago.

If you were older than 59.5 when you distributed all the 401k funds to you IRA, there might be an argument that you never terminated the 001 plan and thus were not late with your 5500-EZ, but that is probably water under the bridge at this point.
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