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Solo 401k Opening Gut-Check Request

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  • Solo 401k Opening Gut-Check Request

    Thanks in advance for reading through the detailed info below + helping a Solo 401k newbie.

    Goal 1 is to create a place where spouse’s deductible IRA assets can be rolled into so that a backdoor Roth IRA can be executed for existing nondeductible basis and future nondeductible IRA contributions.
    Goal 2 is to increase amount of money in spouse’s retirement accounts

    The situation: MFJ couple. All info below pertains to spouse since my retirement counts are separate matter. Spouse is not currently working for primary employer and does not expect to rejoin the workforce in near future (if ever). This primary employer has a 403b, but it is not a good option for incoming roll-overs though they do make a nominal 403b contribution. Also has a SEP-IRA, Roth IRA’s, and Traditional IRA’s (with both deductible and nondeductible contributions). Spouse has multiple small, completely unrelated side-hustles:
    • Side-hustle A: A LLC with an EIN. No employees. Revenue and net profits ~ $20k + $15k.
    • Side-hustle B: Provide music lessons. Revenue and net profits ~ $4k + $3.5k
    • Side-hustle C: Sporadic hours for a firm who pays via W-2 wages. Income ~ $3k/year. No retirement plan available.

    Steps for the proposed plan:
    1. Before the end of 2022 (need to leave plenty of time): Establish a solo 401k.
    2. Before the end of 2022: Make maximum allowable employee contribution to solo 401k considering income/profit from Side-hustle A.
    3. Before 2022 taxes (April, 2023): Fund SEP-IRA based on all Schedule C income except that which is associated with Side-hustle A.
    4. Before 2022 taxes: Make nondeductible traditional IRA contribution for 2022.
    5. Before 2022 taxes: If applicable, fund solo 401k with employer contribution. May get to max with just employee contribution.
    6. Before 2022 taxes: Roll-over existing SEP-IRA and deductible traditional IRA contributions into solo 401k.
    7. Before 2022 taxes: Backdoor IRA non-deductible IRA contribution basis into existing Roth IRA.
    8. In subsequent years I am assuming rinse + repeat but start with step 2.
    Question: Am I missing anything with the plan outlined above? Could this be done more easily without a crunch pre-taxes or projecting employee max contribution to solo 401k before the end of the year? I am aware of retroactive legislation risk associated with backdoor Roth IRA’s in 2022.

    Thank you!

  • #2
    Your plan is far more complicated than necessary. Not too mention, non-compliant with serious plan errors.
    • All of her so-called "side hustles" are just self-employed businesses.
    • All businesses owned >= 80% are part of a Controlled Group. All businesses in a Controlled Group are considered one employer for employer retirement plan purposes.
    • A 5305-SEP IRA cannot be maintained for the same tax year as a qualified plan (401k, etc...).
    • A 5305-SEP IRA is maintained when there are contributions for that tax year.
    • A 401k is maintained from adoption until termination.
    There is a far simpler and compliant process.
    • Treat all businesses as one employer with net self-employed earned income as the basis for contributions.
    • Make no SEP IRA contributions for the 2022 tax year. Any contributions for the 2021 tax year contributed in 2022 are fine.
    • If SEP IRA contributions for the 2022 tax year have already been made. Remove them as excess contributions and earnings.
    • Adopt a one-participant 401k plan at the earliest convenience. Plan documents/adoption agreements from E-Trade, Schwab, TD Ameritrade and Vanguard automatically include all affiliated employers. Fidelity has an entry on their adoption agreement to specify additional affiliated employers.
    • Rollover all pre-tax (and only pre-tax) balances in all traditional, SEP and SIMPLE IRA accounts to the one-participant 401k by 12/31/22. However, the sooner the better.
    • Once done, non-deductible traditional IRA contributions and associated Roth conversions can be done at anytime.
    • One-participant 401k plan employer contributions can be made until the tax filing deadline including extensions.
    • The one-participant 401k plan must be adopted and employer deferral elections completed by 12/31/22 to make employee deferrals for the 2022 tax year. The same deadlines apply for employee deferrals.


    • #3
      Your plan is far more complicated than necessary. Not too mention, non-compliant with serious plan errors.
      Thank you, spiritrider. I appreciate the response and that you took the time to explain what I didn't understand as well as provide an alternative path. I need to dig into the controlled group as that seemed to be the trigger for most of the confusion and missteps. Was leaning towards fidelity so will look for the line in their plan documents about additional affiliated employers. I'll add onto this thread if there is additional confusion but I'm in a much better spot now. Thank you.


      • #4
        I read my post again. In case the last sentence of the last bullet is not clear. I was referring to the deadlines in the 2nd to last bullet.

        If a one-participant 401k is adopted and an employee deferral election is completed by 12/31. A self-employed individual has until their tax filing deadline including extensions to make both employee deferrals and employer contributions.