I own 2 separate solo proprietorships (no employees). I have a solo 401k for 1 business. Can I set up a SEP IRA for the other?

[issie261]

I have two different solo businesses- one as an attorney and one as a real estate broker. No employees. I've set up a solo 401k for the real estate business. Can I also set up a SEP IRA for the legal business? I'm using Turbotax Home and Business 2019.

[MinhT1]

Please read this TurboTax answer which addresses your question.

[issie261]

Thanks much!! This answers my question, but I have one more. I can't find in my Turbotax Home and Business software how to enter amounts for the 2 separate retirement accounts I will be funding. The software seems to only calculate for one plan.

[dmertz]

No, you cannot have a separate retirement plan for each business.  Since you are 100% owner of each business, your two businesses are considered to be a controlled group which must be treated as a single employer for the purpose of a retirement plan.  See the following IRS description of controlled and affiliated service groups:  https://www.irs.gov/pub/irs-tege/epchd704.pdf

[issie261]

Now I'm confused. The first responder seems to say that yes, I can have 2 different plans. Yours says "no" because I own and control both businesses.

But I thought the "controlled group" rule was to prevent a business owner from setting up different businesses to avoid having to include its employees in a retirement plan- hence, that rule perhaps would not apply if neither of my 2 businesses have employees?

[dmertz · Accepted solution]

It's also to prohibit being able to circumvent plan contribution limits by splitting a business.  Without the controlled-group limitation, one with sufficient total compensation, say $600,000, someone could split the business in a way that resulted in compensation of $300,000 from each business and contribute a maximum employer contribution of $56,000 to each plan instead of being subject to a single $56,000 § 415(c) limit (the limit for 2019).  See "Section 415 Limits- Example" in the reference.  This is what TurboTax does on the Keogh, SEP and SIMPLE Contribution Worksheet by doing a single calculation based on the combined profit of the two businesses.  With regard to the controlled-group limitation, it doesn't matter that one businesses is a law business and the other is a real-estate business.

Also note that the most commonly used SEP agreement is Form 5305-SEP which can only be used if the employer (in this case the controlled group) maintains no other type of plan.  Even if this limitation is not present, say, because a different SEP agreement is used, the combined employer contributions between the SEP plan and the 401(k) plan is limited to $56,000 (for 2019) combined, so the separate SEP plan serves no real purpose (except, perhaps, to provide diversification).