Should I keep Solo401K + PSP going?

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Topic Author
Shaneman
Posts: 80
Joined: Sun Apr 14, 2019 8:14 pm

Should I keep Solo401K + PSP going?

Post by Shaneman »

I am thinking of terminating my Solo 401(k) plus Profit Sharing Plan and just wondering if there are any benefits keeping the plan going when I closed my business this past August?

I would rollover the Solo401K/PSP to a tIRA. Presently the assets are all held at Vanguard in a single account titled as Solo 401(k) Pooled Account. My point here is when the account was setup they allowed the contributions to the Solo 401(k) and the PSP to be commingled in just one account.

I have a custom plan and responsible for all plan administration which pay a Third Party Administrator (TPA) $500 a year for maintaining the Solo401K/PSP documents and creating the 5500EZ.

I have always sent in the 5500 EZ certified mail and understand the penalties can be high if the IRS claims that certified envelop never contained the 5500EZ or arrived late.

Here is an example of the penalties that can happen viewtopic.php?f=2&t=301627&newpost=5727165

My primary goal is to eliminate the administration cost, filing the yearly Form 5500-EZ and lessen the chance of the IRS costing me money in a fine/penalty for some documentation glitch.

Over the years I paid the TPA that created the plans to maintain them. They updated the Adoption Agreement and Plan Restatement so the Solo401K and PSP were compliant to the IRS regulation over the last 2 decades a few times.

I was thinking about terminating the plan this month since this would start the 3 year clock for the IRS to audit the plan. Again I am doing nothing wrong but it just seems like if the IRS comes looking it can be costly and who knows how long my TPA will be in business. If I terminate now that allows for 2021, 2022 & 2023.

One benefit I could see keeping the Solo401(K) going would be someone wanting to do back door Roth conversions and they have a tIRA. One trick to get around the Pro-Rata Rule would be to roll the tIRA money into a Solo401(k) if the plan allowed it. This is not applicable to me since I am no longer working.

Little background. I closed down my sole proprietorship business in August 2021. I made a contribution to the Solo401K/PSP for this year in July 2021.

The business was very successful over the last 26 years. In the beginning I used a SEP-IRA to defer taxable income. After using the SEP-IRA for 5 years to contribute a lot more to a retirement account I started using a Defined Benefit Plan with Solo401K/PSP.

In January 2020 the DBP was overfunded but when the market tanked in March 2020 I terminated the DBP and rolled over the assets to a tIRA thus escaping the onerous overfunded DBP excise tax. The TPA fees for the DBP were $1300 per year.

The only benefit I could see keeping the Solo401K/PSP going is the business owned several premium high-quality web domains that I hope to sell in 2022 for over $100K. My accountant tells me since the web domain registrations were paid for from the business thus, any sale will be taxable as business income. If I were to sell the web domains by keeping the Solo401K/PSP going it would allow me to make a contributions to the Solo401K/PSP. My accountant is very conservative and I think other accountants would say the sale of any web domain would be considered long term capital gains since the domains were acquired 26 years ago.

I know this is a long thread but just wanted to include all the facts.
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