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Individual 401(k) for LLC, now sole proprietor
Old 11-06-2014, 11:06 AM   #1
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Individual 401(k) for LLC, now sole proprietor

I figure someone here has dealt with this before... I got a letter from Vanguard last week telling me I need to do a restatement of my individual 401(k). At first I didn't understand it, but after some internet investigating I see that it's and IRS requirement to make sure that the plan complies with any laws passed in the past few years. Ok, fine.

My question, though, is that when I started this 401(k), I was registered with the state as an LLC. My husband and I moved this summer, and I'm winding this business down anyway, so when we moved, I filed to dissolve the LLC in our old state and now I'm set up as a sole proprietor in my new state while I finish out my one remaining contract.

When I called VG to ask about this, they basically said I need to consult a tax professional (which I'm willing to do if that's really necessary) and said that all they need is for me to fill out the paperwork just like I did the first time. But that would require me to say I'm an LLC, which is no longer true. Or, if I want to change it, I fill out a different form which appears to start a whole new 401(k).

Did I cause myself a big problem by dissolving the LLC in my old state before I was ready to close the 401(k)?

Options I can think of:

1 - Just go ahead and close the 401(k). Avoids the issue of restatement but precludes me from contributing the (admittedly small) income I expect to get from my last contract in 2015.
2 - Register in my new state as an LLC. Would this allow me to do a straight restatement, or is it still a problem since it's not the same state?
3 - Stay as a sole proprietor and convert my current 401(k) plan into a new one. This seems overly complicated, but the paperwork itself seems minimal.

I'd greatly appreciate any advice or clarification anyone's got to offer, and like I said, I'm not opposed to checking with a professional if that's warranted.
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Old 11-06-2014, 12:08 PM   #2
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What kind of 401K did you start out with? Is it a solo 401K? I think the issue is how was your 401K set up to start. That doesn't automatically change when you change your business structure. The 401K type and your form of business ownership are separate entities.
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Old 11-06-2014, 01:47 PM   #3
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I really think this is an area where you need to see an accountant so that you make a smart decision. DH had a similar retirement savings plan for a solo practice, he fired himself while still an LLC entitling him to roll over his account to an IRA.
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Old 11-06-2014, 02:32 PM   #4
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What kind of 401K did you start out with? Is it a solo 401K? I think the issue is how was your 401K set up to start. That doesn't automatically change when you change your business structure. The 401K type and your form of business ownership are separate entities.
Yes, it's a solo 401k. Just me, never had any employees.
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Old 11-06-2014, 02:34 PM   #5
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I really think this is an area where you need to see an accountant so that you make a smart decision. DH had a similar retirement savings plan for a solo practice, he fired himself while still an LLC entitling him to roll over his account to an IRA.
Hmm...that's a point I didn't consider, that I would need to fire myself before being able to roll over the 401k. I planned to roll it into an IRA when I finished this contract, but obviously I need to check into that process.
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Old 11-06-2014, 03:11 PM   #6
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You need to consult a CPA. I have an LLc and set up a Simple IRA because of complicated rules regarding a 401(k) plan for a small business. Most likely you will be required to rollover the balance of your existing 401(k) plan into a "Rollover IRA". You will also need to set up a new 401(k) or "Simple IRA" for the new LLC but the deadline to set up such a retirement plan was Oct 1st and is now passed for this year. Consequently, you will not be able to make any contributions this year. Just mho ofcourse. Please do talk to a good CPA. Good Luck!
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Old 11-07-2014, 12:02 PM   #7
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You need to consult a CPA. I have an LLc and set up a Simple IRA because of complicated rules regarding a 401(k) plan for a small business. Most likely you will be required to rollover the balance of your existing 401(k) plan into a "Rollover IRA". You will also need to set up a new 401(k) or "Simple IRA" for the new LLC but the deadline to set up such a retirement plan was Oct 1st and is now passed for this year. Consequently, you will not be able to make any contributions this year. Just mho ofcourse. Please do talk to a good CPA. Good Luck!
Ok, thanks. It sounds like it's not as straightforward as I'd hoped. Time to find a pro...
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Old 11-07-2014, 12:17 PM   #8
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I have a small business 401K administered by a pension firm. I just received a notice that all plans need to be restated by no later than April 30, 2016. Maybe you have time to get in your latest contribution and then shut it down before the legal deadline? I don't know but it might be worth checking up on.

I'd suggest if Vanguard cannot answer your questions to pay for some hourly advice at a benefits firm with people who do pension work for a living. In my experience my CPA was not really an expert on these kinds of matters. There are a lot of laws that benefit firms specifically keep up with in detail.

The person we work with is a QPA and QKA:

https://nbsbenefits.com/qka-qpa/
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Old 11-07-2014, 12:24 PM   #9
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I would go back to the firm that established your 401K for direction or a CPA who has small professional groups as clients.
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Old 11-07-2014, 03:28 PM   #10
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As a CPA I would advise you to close out your Solo 401(k) for the LLC. Set up a new one as an individual. You are not going to find a lot of guidance online regarding this. Technically, a sole member LLC is a disregarded entity. In the eyes of the IRS it doesn't exist. It is the same as being a sole proprietor. HOWEVER, the IRS code is not consistent, and part of the 401(k) rules are governed by DOL.
I don't think you will find some one who says, sure take the risk and keep the plan going. Too much risk doing that in my estimation.
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Old 11-07-2014, 03:37 PM   #11
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The OP should read the provisions of her 401(k) about what happens when a participant terminates or the employer ceases to do business. Follow those provisions. I think she will need prepare a letter of termination to 'terminate' herself as an employee of the LLC, silly as it may seem, to make it official.

The real question is who will accept the assets of the 401(k) for a rollover IRA. This is when those Fidelity offices are priceless.
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Old 11-07-2014, 08:30 PM   #12
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The OP should read the provisions of her 401(k) about what happens when a participant terminates or the employer ceases to do business. Follow those provisions. I think she will need prepare a letter of termination to 'terminate' herself as an employee of the LLC, silly as it may seem, to make it official.

The real question is who will accept the assets of the 401(k) for a rollover IRA. This is when those Fidelity offices are priceless.
+1.

I'm pretty sure my E*TRADE individual 401k has an option for in-service rollovers, so there may be a few options to move it to an IRA.

It also seems likely that OP could just have two 401k's, like many people with 401k's at past employers. Especially if OP is using a new EIN for the sole proprietorship. And especially if the two businesses overlap in time. If the EIN is the same I'd look into just keeping the same 401k.
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Old 11-08-2014, 03:42 PM   #13
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Usually Vanguard customer service is pretty good on answering those kinds of questions clearly. Maybe try dropping them an email from your account and see if you get the same answer (could be you caught the wrong person or someone who just didn't understand). If you are eligible to just roll the Solo 401k to a new SEP IRA that's very easy to do from the site.
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Old 11-11-2014, 11:33 PM   #14
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My understanding is:
You should rollover your existing 401(k) plan into a "Rollover IRA". Available at any brokerage and at Vanguard as well. They will help you do this.
Think about it, the LLC is gone, but all the 401K contributions are vested to you the employee, so you can roll it over to the rollover IRA
Also set up a new 401(k) getting a new EIN from the IRS website (Vanguard will tell you the URL to do this).
Most important, you still have time to open the new one, do it immediately as the paper takes some time. As long as you open it in 2014, you can wait until April 2015 to actually put money into it.
So do the rollover, and opening new 401K at the SAME time as they are not even related to each other in the eyes of irs/vanguard.
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Old 11-13-2014, 09:44 AM   #15
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Thanks for all these replies! Clearly a fuzzy area.

I called VG back again and got a different person, who said it's no problem at all. As a sole proprietor, I'm still eligible for an individual 401k, so she said just fill out the restatement paperwork with the current, updated information.

I also called the local SCORE chapter and had a quick chat with a CPA who does a lot of small business tax stuff. He said the same thing, that it shouldn't be an issue. The only thing he wondered about was if the name of the 401k included LLC, then I might want to start a new plan instead. From what I can tell on the paperwork, that's not an issue.

I will likely call VG back one more time before proceeding, but that's for next week...I'll come back with an update if I get a new answer.
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Old 12-10-2014, 09:11 AM   #16
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Following up...

Called VG one more time and got someone on the phone who gave me yet another slightly different answer. He said to fill out the restatement form with the current information (sole proprietor). That's enough to update the plan. Did that and got the confirmation from VG today that the changes have been noted, which I think means I'm all set.

He said there was no need to stop the plan and start a new one, that the restatement form was sufficient to cover the change from LLC to sole proprietor.

Thanks for everyone's help with this!
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