Greetings and wish you well. I heard about your helpfulness and appreciate if you can kindly advise me the following:
We (mother and daughter) have an S corp and set up solo 401(k)s. I made an error in profit contribution. Unfortunately, I contributed more than allowed into a solo 401(k) in regards to the profit sharing contribution because of my misunderstanding in calculating the 25% earning that can be contributed to solo 401(k)s.
The extra amount is $4,000 for myself and $282.54 for my daughter.
Please kindly advise on what action is needed to rectify this mistake.
Your situation is complicated and should involve the advice of an experienced ERISA attorney. The IRS has established self-correction methods, but the rules are different depending on the Code section that was violated. For example, in your situation, if the mistake was that you took much compensation into account when calculating the 25% employer contribution, the excess (adjusted for earnings) can be placed into a separate unallocated account within the plan. This account would then be used to reduce employer contributions in the future and would be allocated just like it would have been but for the mistake. While money remains in the separate, unallocated account, the employer cannot make any contributions to the plan other than employee salary deferrals.
On the other hand, if the miscalculation caused you and your daughter to exceed the total maximum amount for year (i.e., called the “415 Limit” and $54,000 for 2017), the correction method becomes more complicated. It involves a step process where applicable amounts are first distributed as excess contributions and then, if any excess remains, are segregated in an unallocated account within the plan. The segregated account would also hold any forfeited matching contributions.
I often tell clients, there are certain legal problems they can tackle on their own and others that really require the expertise of an attorney. This one is the latter. I would start with the legal/compliance department for the plan’s recordkeeper. If you are still not satisfied, you would want to talk with an experienced ERISA attorney.
My father passed away on Oct 8, 2017 and named me as the sole beneficiary of his IRA, with a value of $72K. When I closed the account and received a cashier’s check in the full amount I was unaware of the tax implications until recently. I have not cashed the check and wonder if there is a way to backtrack and “retitle the IRA” either with the original bank or Edward Jones, my financial advisor.
Could I open a new IRA with the proper title named IRA “deceased Oct 8, 2017 and for the benefit of XX”
Would you have answered this question and have a link to your advice?
Unfortunately, once you closed the account and received a full distribution, you lost the ability to treat the sum as an inherited IRA. Even though you have not “cashed the check,” the issuance of a check payable to you constitutes a distribution under the Tax Code. For a non-spouse beneficiary, once that happens, there is no going back. As a result, the value of the check will be included in your gross income for the year of receipt. You will receive a 1099-R from the IRA custodian that should be filed along with your annual return.
While you can’t undo this mistake, you can look towards the future. You may be able to contribute a portion of that money to either a Traditional or Roth IRA. The annual maximum contribution limit for 2017 and 2018 are the same: $5,500 per year plus an additional $1,000 catch-up contribution if you are age 50 or older. Since it is before the tax filing deadline, you may be able to contribute for both 2017 and 2018! However, make sure you meet all the other eligibility rules before you contribute.
For example, let’s say you are age 55 and were eligible to contribute to either account for both years. Since you were above age 50 for 2017 and 2018, you get to use the additional $1,000 catch-up contribution for both years. As a result, you could contribute $13,000 to an IRA today. From that contribution, $6,500 would be attributed to 2017 and the other $6,500 attributed to 2018. If you use a Traditional IRA, you would have to determine whether you could deduct all, or a portion, of each year’s contribution. If you use a Roth IRA, you won’t get to deduct any of the contributions. However, those contributions will grow on a tax-free basis for future use.