Can I make a contribution to a one-participant (solo) 401(k) before October 16, 2017 and amend my extended return filed in August to claim a deduction?

[hdukeman10]

Was not aware of the 401(k) option until just after filing.  Would be a big help with some retirement planning to be able to make both 2016 and 2017 contributions yet this year.  Having trouble finding proper guidance.

[SweetieJean]

According to Solo 401k contribution deadline rules, plan participants must formally elect to make an employee deferral contribution by Dec. 31, 2016.  Did you do so?

[dmertz]

To be able to contribute at all for 2016, you were required to have established the one-participant 401(k) plan before the end of 2016.  If you were not aware of the option prior to August 2017, it seems likely that you had established such a plan by the deadline.

As SweetieJean said, to be able to make an elective deferral for 2016 you were required to have made the deferral election by the end of 2016.  Even if you didn't make an elective deferral election, if you had established the plan by the end of 2016 you can make a profit-sharing contribution up to the due date of your 2016 tax return, including extensions.

[hdukeman10]

My business is a Schedule C sole proprietorship.  I'm sure I can find documentation in my files telling myself I was electing to make a deferral contribution as part of my 2016 income tax filing.  However, no plan was formally established in calendar 2016.

All else seems to track.  Form 4868 mailed 04/11/17.  Form 1040 filed electronically 08/23/17.  However, no contribution was made so the deduction was not taken.  Now the contribution can be made.  So I'm trying to assure creating a plan, making a contribution and filing a Form 1040X is a legitimate, allowable procedure to qualify for taking the deduction (assuming an election is in my firm's files).

[dmertz]

Given that there was no 401(k) plan established by December 31, 2016, documentation indicating that you had elected by December 31, 2016 to make an elective deferral to the plan would obviously be fraudulent.

[hdukeman10]

Looks like I'm out of luck.  Will start a plan for 2017 and use it in future years.  Thanks dmertz

[dmertz · Accepted solution]

Since you had no plan established by December 31, 2016, no 401(k) contribution is permitted for 2016.  The only type of plan that can be established after the end if 2016 to receive a self-employed retirement contribution for 2016 is a SEP plan.  A SEP plan can be established and a SEP contribution made to a SEP IRA up until the due date, including extensions, of your tax return for the year of the contribution.  Contributions under a SEP plan are employer contributions, equivalent to a profit-sharing contribution to a 401(k).

If you establish a one-participant 401(k) plan before the end of 2017, you'll be able to make elective deferrals and a profit-sharing contribution for 2017 based on your 2017 net profit from self-employment.  However, you generally cannot maintain a 401(k) plan for the same year as a SEP plan (because this is not permitted with a SEP plan established using Form 5305-SEP, as most self-employed SEP plans are), so if you establish a SEP plan to receive a contribution for 2016, you would have to terminate the SEP plan for 2017 to be able to establish a 401(k) plan.

[dmertz]

See IRS Pub 560 for information on retirement plans for small businesses:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p560.pdf">https://www.irs.gov/pub/irs-pdf/p560.pdf</a>

[hdukeman10]

On second thought, perhaps it's worth the trouble to do a SEP for a year.  It seems to only create about one-half of the deduction a 401(k) would generate,  Pub 560 seems to indicate on page 19 that the SEP can be rolled over into the 401(k) that I really want to use for 2017 and later years.  But I'm 71 and there will probably be a RMD involved.  Still likely to save some tax dollars.  dmertz, do you think it's worth the effort to set up and roll over?  I've no experience setting these solo plans up.

[dmertz]

The SEP can be rolled over to the 401(k) provided that the 401(k) plan agreement permits the rollover.  However, such a rollover will increase the likelihood that the 401(k) plan balance reached the $250,000 threshold above which you must file Form 5500-EZ each year for the 401(k).

You will not have an RMD for 2017 from the SEP IRA since the SEP IRA did not exist on December 31, 2016.  If you roll the entire SEP IRA balance to the 401(k) by December 31, 2017, you won't have an RMD for the SEP plan for 2018; the RMD requirement on that money will be transferred to the 401(k), adding the same RMD amount to your 401(k) plan for 2018.  Your 401(k) will be subject to RMDs because you are more than a 5% owner (in fact, you are 100% owner) of your self-employment business under which the plan will be established.  Instead of rolling the SEP IRA over to the 401(k), I would instead consider converting the SEP IRA to a Roth IRA, paying the taxes on the conversion, then leaving the Roth IRA to grow with the growth being tax free once 5 years have elapsed from the beginning of the year for which you first established a Roth IRA.  (If this would be your first Roth IRA, a Roth conversion in 2017 would result in the Roth IRA growth being tax free beginning in 2022.)  A Roth IRA does not have RMDs.  If you waited until 2018 before converting to Roth, you would have to complete the SEP IRA's 2018 RMD before converting the remainder.  You'll also want to consider rolling over to a Roth IRA portions of the 401(k) to avoid RMDs on that money as well.  If the marginal tax rate on the conversion or rollover is the same as the marginal tax rate that you would expect to pay on regular withdrawals from the SEP IRA or 401(k), it generally pays convert or roll over; it's not all about immediate tax savings, think long-term.

Setting up a SEP plan is trivial.  Most custodians have you use IRS Form 5302-SEP to establish the plan, then you open a SEP IRA account the same way as a regular traditional IRA, but, by default, the custodian reports contributions as being SEP contributions instead of regular personal contributions.  Setting up a solo 401(k) plan is a bit more involved and has more recordkeeping to support your deferral election, your employer contributions, and to file Forms 5500-EZ when the balance gets high enough.

[hdukeman10]

dmertz  Thank you for sharing.  I will digest all of your guidance and make some decisions.