Accidently rolled over what I think were non-deductible IRA funds to my solo401k

Home Fairmark Forum Retirement Savings and Benefits Accidently rolled over what I think were non-deductible IRA funds to my solo401k

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  • #5148
    Exponent500
    Participant

    Hey there,

    I’ve posted this on another forum, but figured I’d try here as well.

    So my situation is I opened up a solo 401k in July of 2018 for a sole proprietorship that my wife and I are owners of. We then almost immediately rolled over IRA funds from both of our IRAs at the time.

    My funds that were rolled over were all non-deductible (although I forgot to claim them as such on our 2018 return — i’ll be rectifying this via an amended Form 8606 if i get confirmation here that these were in fact non-deductible).

    My wife’s funds that were rolled over (8.5k to be exact) were partially deductible (3K worth) and partially non-deductible (5.5K worth). Just like in my case, we forgot to claim her 5.5K as non-deductible and will be rectifying this via an amended Form 8606 if I determine that they were in fact non-deductible).

    So out of this I have two high level questions:

    1. Were my rolled over IRA funds in fact non-deductible, and was my wife’s 5.5K also nondeductible?
    2. If the answer to both question in question #1 are yes, then how do I go about getting those funds out of the solo 401k?

    To help determine the answer to question #1:

    1. Previous to 2018 neither my wife nor I had ever opened up any traditional IRA accounts.
    2. In April of 2018 my wife opened her first traditional IRA ever through Schwab, and made a 2017 contribution of $3000 that was deductible (which she deducted on her 2017 return).
    2. In July of 2018 my wife contributed $5500 (for tax year 2018) to that same IRA.
    3. In July of 2018 I opened my first traditional IRA ever through TDAmeritrade and contributed $5500.
    4. In July of 2018 my wife rolled over all $8500 of her traditional IRA funds into our Solo 401k
    5. In July of 2018 I rolled over the all $5500 of my traditional IRA funds into our Solo 401k.
    6. Our MAGI was 206,000 in 2018
    7. My wife contributed to her employer sponsored plan in 2018
    8. I did not contribute to an employer sponsored plan in 2018
    9. We filed a joint return in 2018 as we got married in June 2018.

    Regarding question #2:

    Is it true that I should follow the SCP option within the EPCRS? If yes would that entail filling out just one 1099-R (or two, one for my wife and one for me?) and mailing it to the IRS along with a check for tax on any earnings that were made on the basis we rolled into the solo 401k?

    As far as filling out the 1099-R, would I do it as follows?

    Box 1: Total distribution (basis + earnings off said basis)
    Box 2: Earnings made off the basis
    Box 3: Same value as Box 2?
    Box 4: Use whatever my marginal tax rate is in 2020 (or the year in which i made the erroneous contributions — in this case 2018) and apply that to the values in box 2 and 3?
    Box 7: Code E? Do I check the checkbox right next to this box (the one that says IRA/SEP/Simple)?
    Box 12: Should I withhold any state tax as well? If so should I use the marginal tax rate of 2020 or 2018?
    Boxes 13-17: Not sure if I need to enter anything there

    #5170
    Alan S.
    Participant

    I replied to this post on another forum. But EPCRS does not specifically address how to correct this infraction, which falls into the class of “excess amounts”. Therefore, my response is just an educated guess.

    Would welcome someone with specific knowledge of this issue to respond. If no one does, I will copy my other response to this post in a couple weeks.

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