Solo 401(k) questions, potential tax problems(?!) and roll overs

[Marquette]

I have a full-time job. I max out my 401(k) at work.

I also occasionally do some side work. The last time I had a significant enough income to worry about was 2004. To wipe out as much liability as possible, I contributed $6,000 (20% of profit) to what I thought was going to be a SEP in April, 2005. This was as a sole proprietor.

I didn't really pay attention to it (FA at the time set it up). However, turns out that my FA set up a Solo 401(k).

In doing some digging I read on Kiplinger.com (SEP vs. Solo 401(k) - Kiplinger.com) that Solo 401(k)'s have to be established by the end of the calendar year (I'm assuming this isn't a recent change) even though they don't need to be funded until April 15th of the following year. Does this mean that I'm going to have some issues if I'm audited? After all, my Solo wasn't set up until April.

Second question. I don't know when the paperwork was sent in for the Solo but it wasn't established until April 20th. Is the April 15th deadline for funding or mailing? (I assume mailing).

Ok, last and biggest question. I don't like my money where it's at. What are my roll-over choices? If it helps, I need to make a contribution this year as well. It will probably be around $4k. I'm filing this year as a single member LLC.

It looks like Fidelity offers a Solo 401(k) and I would think I could just transfer the account to them. However, would I also be able to roll over to a SEP-IRA at Vanguard? Or, would I be able to roll over to my IRA at Vanguard? I've found plenty of articles about rolling a SEP to a Solo in order to borrow against it, but I've been unsuccessful in finding much.

 

[samclem]

Marquette,
I don't know the best way to fix what has been done incorrectly (and if you might have some recourse for recovering any costs/taxes from the FA that did this--though you DID sign the papers). I'm a little surprised that a company would open a Solo 401(k) for you after Dec 31st and accept a contribution for the previous tax year. Is it perhaps possible that the amount was characterized by them as a contribution for tax year 2005 (though you took it off your 2004 taxes)?

I have a solo 401K at Fidelity and have been very happy. I don't know how you'd go about rolling the funds over into an IRA. Working from memory, i think there's a requirement that you have a qualifying event to make this possible (just as you'd need to leave a regular employer in order to leave their 401K plan and roll the $$ into your IRA). I wonder, as a self-employed person, how hard this would be--"Hey, I shut down my biz known as 'Smithco' on 31 Dec 2007 and rolled by solo 401 K money into the IRA. On 1 Jan 2008 I re-opened as 'Jonesco" and started a new solo 401K." This would not only allow you more flexibility on where you put those funds (e.g . Vanguard offers IRAs but no Solo 401Ks), but you could also stay under the reporting requirements that start when the solo 401 K assets hit $100K

 

[Marquette]

sam,

Yes, I did sign the papers. And, I'm very aware that "I don't know why I did that" is not a valid defense. That's the trouble with putting too much trust in someone that you expect to know what they're doing.

I'm wondering if the financial institution set up the contribution towards 2005 since it was after the deadline. This could be an even better mess than I was banking on.

As for the roll-over, that's kind of what I was thinking. Since I was a sole prop and am now doing business as an llc, I did leave my old company.

 

[Martha]

I worry that you risk not having a qualified plan due to the improper contribution. Go see a CPA and work on a strategy to fix this.

 

[Marquette]

I called AIM today and verified that it is a Solo and it was established in April of 2005. I'm off to find a CPA now (what a GREAT time of the year to try and find one too!).

Thankfully I haven't contributed any in other years so my liability at this point is limited to the 2004 tax year.

 

[perinova]

A remark about having two 401ks: If you deposit more than the maximum you will have to declare the difference in your earned income. This applies if you change job mid year and contribute more than the maximum allowed as well.

I kind of think that the december limit to open the 401k is due to the fact that a corporation needs to close the books by that date? Since you were a sole proprietor opening post December might not be a problem.

The profit sharing (matching) portion needs to be funded by the time the return is due. (For a corporation: March 15).
A corporation also needs to be fund the employee portion no later than 15th of the month following when it was deducted from the paycheck. Since there is no paycheck a sole-prop might be able to wait Apr-15 too?

 

[Marquette]

Perinova,

I hope that's the case, but what I've been reading about Solo 401(k)'s explicitly state that they have to be established by end of the tax year but can be funded by April 15th... ie, I would have been fine if I had sent in the paperwork to start the plan in december and actually sent the check by April 15th. I will report back when I find out.