Scorp and SEP

[JCH]

Client started a new Scorp in 2009, and didn't setup solo 401(k) like I recommended early on. He has an existing SEP he used with his old Sch. C. Can he contribute to the SEP 20% of his W2 wages from the Scorp and/or can the Scorp contribute to his SEP? Thanks.

[ChEAr$]

Client started a new Scorp in 2009, and didn't setup solo 401(k) like I recommended early on. He has an existing SEP he used with his old Sch. C. Can he contribute to the SEP 20% of his W2 wages from the Scorp and/or can the Scorp contribute to his SEP? Thanks.

Nope. The corporation must be the sponsoring organization in order to deduct
contributions of 25% of wages into his IRA established in conjunction with the
corporation's SEP.

[Possi]

Not what I was told...

I was told by my investment company that the SEP which was established before I was incorporated, but was still running the very same business (sole prop to s corp) was ok.

I did not open a new SEP, but am using the same one.

I hope they know what they are talking about! I am not the expert, but trusted them...

[ChEAr$]

I was told by my investment company that the SEP which was established before I was incorporated, but was still running the very same business (sole prop to s corp) was ok.

I did not open a new SEP, but am using the same one.

I hope they know what they are talking about! I am not the expert, but trusted them...

And did you check with your barber? wife's hairdresser for another opinion? (grin

[JohnH]

He does have to set up a new SEP via the S-corp. He can only combine the accounts if'/when the S-corp ceases to do business. I don't know of any good reason not to follow the rules on this. A SEP is so easy to set up and all it means is there would be 2 different accounts - why take any chances on a cumulative 6% excise tax and loss of the tax deduction along with penalties interest if some minor detail is handled incorrectly? If he's especially enamored with how the existing SEP is allocated, he can even mirror the investment allocation in the new SEP if he wishes.

And I'd never rely upon the advice of an investment advisor unless they are willing to put thei advice in writing and back it up. If their verbal advice on a tax matter is wrong, they're going to point to the boilerplate in their agreement, which says "Consult your tax advisor." Guess who gets left holding that bag?

[JCH]

Thanks for the responses. Can someone point me to the limits for employees and employers in this situation?

[ChEAr$]

Thanks for the responses. Can someone point me to the limits for employees and employers in this situation?

the limit for the corporation is 25% of salary and it must be so specified in the plan.

For the employee, the limit is either $5,000 or $6,000 into the IRA, usual rules.

[Possi]

Thanks

I will take care of the switch tomorrow.

[oceanlovin'ea]

Investment people make mistakes and don't always know tax laws.

Last year one of my S corps put the money in the SEP account from personal funds. When I found out I told them only the corporation could make the contributions, she called the brokerage firm and told them. A lady called me and asked for further information. I gave them the cites from the tax book. The lady went back and did more checking and found out I was right. They made the necessary changes to move the deposits to a personal account.

Client was very impressed and so was investment people.

So just proves, always do your research yourself.

Linda

[Possi]

Tax law changes...

... make it difficult for everybody. It is my responsibility to be sure this is done correctly. With all the different compliance issues today, I wasn't real smart to trust that decision when I read it myself, that the Corp had to originate the SEP IRA.

I live and learn. I just hope I can get this straight so I'm not in any trouble.

Thanks for keeping me on the straight and narrow. The investment company will be impressed with my (refreshed) knowledge.