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Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 35 years experience providing financial advice
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401K question My husband was 100% share-holder of C-Corp.

Customer Question

401K question: My husband was 100% share-holder of C-Corp. As of this year, he terminated the C-Corp. and operating business under the same business name but as sole proprietorship. The C-Corp. have 401K pension plan.
Can he continue the 401K plan under C-Corp. even if the business changed to C-Corp to sole proprietorship ? Should he roll over 401K to solo 401K?

What is the maximum for 401K contribution (65 & Over ) for sole proprietorship - employee/employer inclusive ?

Can he contribute for his wife even though she is not working ?
Submitted: 7 years ago.
Category: Tax
Expert:  Anne replied 7 years ago.
HICustomerbr />
Thank you for using justanswer. Since 401K contributions are based on a % of your salary, and your husband will no longer have any salary from the C Corp, he may not contribute to the 401K that was set up thru the C Corp.

Your husband may contribute up to 20% of his self employment income as a Sole Proprietor into an SEP, which is the self employed individual's equivalent of a 401K. In order to calculate your husband's eligible income for the SEP, he must subtract 1/2 of his SE tax before calculating the 20% limit. (SE tax is the social security tax that all self employed individuals who file as sole proprietors are subject to, and it is 15% of the NET earnings, after deducting the expenses realted to the business income)

See below:

Form 1040 (Schedule SE)

If you are not working, your husband may still contribute up to $5000 to a spousal IRA for you ($6000 if you are over age 50)

Please see below for more in depth information:

Publication 560 (2008), Retirement Plans for Small Business

I hope this helps.

Expert:  Bill replied 7 years ago.



Anne is correct that you cannot contribute to the 401(k) that was established by the C Corp but you can establish a 401(k) for your sole proprietorship and possibly contribute more than to a SEP. The assets that are in the existing 401(k) can be rolled over into the new 401(k).


Depending on the amount of your net income (line 31 on Schedule C) you may be able to contribute more to the 401(k) than to the SEP because in addition to being able to contribute 25% (the employer contribution which is 20% of your net earnings from self-employment) to the 401(k) you can also make contributions that are considered elective deferrals. Your elective deferrals can be up to $16,500 ($22,000 if age 50 or older). However, the maximum contribution you can make combining both your elective deferral and your employer contribution would be $49,000 ($54,000 if age 50 or older).


Another type of plan that you might consider is a SIMPLE IRA which could permit you to contribute more than a SEP if your net income is less than about $74,000 and depending on your age.


Edited by Bill on 10/3/2009 at 4:16 PM
Customer: replied 7 years ago.

In reference to roll over from former C-Corp to sole proprietorship , can we roll over 100% of C-Corp. 401K consisting of both husband and wife into sole proprietorship solo 401K , with my husband of business name ?

Expert:  Bill replied 7 years ago.

If both of you have accounts in the 401(k) plan then you can both roll over to a new 401(k) if you will both be participants in the new plan. If you will not be working for the sole proprietorship then you cannot be a participant in the new plan. However, you could roll your account over to a traditional IRA on a tax-deferred basis.



Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3153
Experience: EA, CEBS - 35 years experience providing financial advice
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