Solo 401k Question

[FRWY]

I started my own practice this spring and am now looking at solo 401k vs. SEP IRA vs. SIMPLE IRA.  I have 3 employees.  One of the employees will end the year with just over 1,000 hours but none will have worked for > 1 year.  I was leaning towards solo 401k this year (so I could do a backdoor Roth); then switching to SEP IRA next year.  I understand I cannot do a backdoor roth once the SEP is open but I'm not sure of a better option.

Does this seem reasonable?  If so, do others have suggestions on where I can open a solo 401k with this practice situation?  Thanks.

[jacoavlu]

Hmm I'm not sure if you can have a solo 401k with the non-spouse 1,000+ hour employee <1yr employee ... need an expert opinion on that.

Going forward a solo 401k is probably not going to be a solution for your practice. You may consider at a safe harbor 401k, get a consult for a plan design, see how much a plan is going to cost you in admin and employer contributions.

But you may be too late for 2018, the plan has to be open by 12/31 but there are timing issues I believe including 30 day notices for employees that may make an effective deadline of the end of this week...

You're correct that having a SEP IRA is going to cause some issues with a yearly backdoor Roth. You can still make your nondeductible contribution.

[DMFA]

Safe-harbor 401(k), probably.  If that doesn't work due to cost, then prob SIMPLE-IRA.

[spiritrider]

Except at Vanguard, you can adopt employee eligibility restrictions for one participant 401k plans. You can restrict those < age 21 and a one year service requirement of >= 1,000 hours.

However, those requirements must apply to all employees, including you. If you had adopted or amended the one-participant 401k before you had employees, you could have exempted yourself. Now if you exempt current employees, that will apply to all employees meaning you can not adopt a one-participant 401k. If you don't exempt current employees, their are no eligible employees, including you.

You have the same problem with SEP IRA eligibility. It will apply to you also. With no eligibility restrictions you could adopt a SEP IRA for 2018, but the employer contribution rate must be the same for all employees.

@Peds is correct that a SIMPLE IRA plan or a Safe Harbor 401k are probably your best choices, but as pointed out by @jacoavlu it is too late for a Safe Harbor 401k plan. There was an October 1 deadline for both a Safe Harbor 401k plan and a SIMPLE IRA plan for 2018. There is a December 1 deadline for a Safe Harbor 401k plan starting January 1, 2019 and 30 days for later plan effective dates. A SIMPLE IRA plan requires a 60 day notice before the effective date.

[HumbleInvestor]

Check with some 401k plan administrators. You may still be able to start a plan with plan start date after Jan 1st. (say Apr 1 2019).

[FRWY]

Thanks everyone.  It sure would have been nice for my accountant to have given me this information earlier this year before hiring any employees, but I guess that's why I should have been on WCI earlier.  It sounds like for 2019 and beyond, Safe Harbor 401k or SIMPLE IRA would be the best option, but I've missed the deadlines for 2018.

@spiritrider and others - do I have any retirement plan options for 2018 left, or should I forget retirement plans and just max out my backdoor Roth and 529 plan etc. for the year?  If I start the SIMPLE IRA plan next year, that would cause problems with the balance I already have in my Roth IRA from the past few years of contributions, correct?

[spiritrider]

Get started on a Safe Harbor 401k or SIMPLE IRA for 2019 ASAP. You will not be able to start the Safe Harbor 401k until after a 30 days notice to your employees. You will not be able to start a SIMPLE IRA until after a 60 days notice to your employees.

Your only practical 2018 tax year option is a SEP IRA with an age 21 restriction, but with a 0 years of service restriction. You have until your tax filing deadline including extensions to adopt and contribute to a SEP IRA plan. You may not want to make any contributions until 2019, see below.

You can select a contribution rate from 1% - 25%, but that same rate must apply to all employees >= age 21 with compensation >= $600 for the year. A W-2 employee's (including an S-Corp 2% shareholder-employee) contributions will be their W-2 Box 1 * the contribution rate.

If you are a self-employed owner, your contributions are calculated as your net self-employment earnings (business profit - 1/2 SE Tax) * plan contribution rate / (1.0 + plan contribution rate). You can also get this rate from IRS Publication 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), Chapter 5. Table and Worksheets for the Self-Employed, Rate Table for Self-Employed, Page 23. E.g. 15% = 0.15 / 1.15 = 0.130435.

If you make the SEP IRA contribution after 12/31/18, it will not make you an active participant for 2018 and will not interfere with a Roth conversion done for a Backdoor Roth in 2018.

If you and your spouse were not active participants in any employer retirement plan for 2018 and have not done the Roth conversion component of a Backdoor Roth. You could take the deduction on a traditional IRA contribution instead.

SIMPLE IRA contributions would not interfere with any existing Roth IRA balances, but pre-tax balances is all traditional, SEP and SIMPLE IRA accounts on 12/31 cause future pro-rata Roth conversions.