Maintaining both SEP IRA and Solo 401K and Pub. 560 Contradictions

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bricksifter
Posts: 1
Joined: Thu Apr 22, 2021 12:50 pm

Maintaining both SEP IRA and Solo 401K and Pub. 560 Contradictions

Post by bricksifter »

I'm looking to open a Solo 401k but missed the deadline for 2020. Will now open a SEP IRA and fund for 2020, but will also open a Solo 401K later in the year. There's been much discussion about whether you can have both open at the same time.

From Pub. 560 page 6:

When not to use Form 5305-SEP. You
can't use Form 5305-SEP if any of the following
apply.

1. You currently maintain any other qualified
retirement plan other than another SEP.

Question: So I could open the SEP IRA before the Solo 401K and still use Form 5305-SEP, but if I opened the 401K before the SEP IRA I couldn't use Form 5305_SEP but some other prototype SEP Form? All this says to me is when the form can be used, not whether you can have both at the same time.

Which leads to this passage in Pub. 560 same page 6:

More than one plan. If you contribute to a defined contribution plan (defined in chapter 4),
annual additions to an account are limited to the
lesser of $57,000 or 100% of the participant's
compensation. When you figure this limit, you
must add your contributions to all defined contribution plans maintained by you. Because a
SEP is considered a defined contribution plan
for this limit, your contributions to a SEP must
be added to your contributions to other defined
contribution plans you maintain.


As far as I know, both the SEP IRA and the Solo 401K are classified as defined contribution plans. This tells me that you can have both open at the same time and contribute to both in the same tax year as long as you stay below the limits.

I know all of this has been discussed before, but I could not find any posts referencing the above passage but only the first part about using Form 5305-SEP. Is Pub. 560 the definitive source on all this? What source does everyone use to determine that you can't have a SEP IRA and a Solo 401k at the same time? I personally don't know the right answer, just trying to get some more clarity on the issue after reading Pub. 560. Thanks.
terran
Posts: 2966
Joined: Sat Jan 10, 2015 9:50 pm

Re: Maintaining both SEP IRA and Solo 401K and Pub. 560 Contradictions

Post by terran »

Two things that might help clear things up: 1) I'm pretty sure "maintain" means "actually contribute to for the year" so you could have both accounts open during the year as long as you only contribute to one of them and 2) not all SEP IRAs are 5305 SEP IRAs -- I seem to recall Schwab's is not.

Also, thanks to the 2019 SECURE Act the deadline to open a solo 401(k) for a year is now the tax filing deadline for that that year (May 17th this year, usually April 15th) including extensions (October 15th), so you probably still have time to open a solo 401(k) for 2020, and definitely if you file an extension. Make sure you indicate an effective date on January 1, 2020 so you can count all of last year's income in your contribution.

One thing to note is that you're required to make the election for your employee salary deferral contribution by December 31st. This election isn't reported anywhere and is only kept in your records, but the fact that you didn't create the plan until after that date seems like it would make it pretty clear that you didn't make that election for 2020, so I wouldn't make employee contributions. The employer contribution for a solo 401(k) is the same as for a SEP IRA, so for 2020 you'd have the same contribution limit either way, but you'd avoid the hassle of opening both plans and having a SEP balance to either mess up backdoor Roth contributions if you ever need to do them or need to roll over to the solo 401(k).
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